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Technology sector is hot target for private equity firms in second half of 2011

by david.nunes

Technology sector is hot target for private equity firms in second half of 2011

Technology firms have moved up the rankings from fifth place to being the second most coveted sector for Private Equity (PE) investments, with 37% of PE firm expecting to be more active in this space over the next 12 months.

This is according to finance and business advisors Grant Thornton UK LLP’s  PE Barometer, which gauges the sentiment of 100 PE executives quarterly.

One of the few sectors to see raised expectations on activity in the next year, the tech sector improved by 8 percentage points on the previous quarter when 29.3% of PE firms asserted it as an active target. The sector is now level with the consumer retail and food sector and has overtaken the healthcare and manufacturing sectors at 26% and 36% respectively. It is still however behind the business support sector which is the most attractive sector  with 47% of PE firms expecting investment activity to increase in this sector.

Expectations of multiples achieved in the sector have however been reigned in from the 7.7x EBITDA seen in the last quarter to 7.1x this quarter, moving the sector from a top position to a joint second place in the sector rankings, behind the healthcare sector at 7.5x, and level with media and communications at 7.1x EBITDA.

Wendy Hart, Technology corporate finance partner at Grant Thornton UK LLP, says:  
“There has been a clear shift in sector preference over the last six months.  2010 saw private equity groups making their return to the technology sector and this activity has helped it recover from the recession better than most. This appetite has continued, and improved into 2011, albeit multiple expectations have fallen.

“The table for this quarter echoes our experience of the transactions market where we have seen a strong focus on IT services and software assets, particularly from mid-market PE houses and trade acquirers. Businesses that are big enough to be standalone investments and which other smaller businesses can be bolted on to through acquisition – so-called platform investments – are particularly attractive, especially where they offer some degree of differentiation and specialised capability.

“Security, cloud based services and software which lends itself to a SaaS model, are also strong contenders, as are businesses with a concentration of genuine managed service revenues.

“The IT services sector offers real opportunity for consolidators with large numbers of sub-scale and generalist service providers. For larger and more specialist businesses, multiples are reasonably buoyant – not least because PE houses are competing for assets. We have seen multiples of 7-8x EBITDA regularly, and multiples as high as 9x EBITDA for strong assets. For smaller and more generalist businesses, multiples are more prosaic, around the 4-6x mark.

“The PE Barometer shows that the sector is holding up remarkably well and indeed improving compared to some of the falls seen in sectors such as the industrial and materials sectors, and real estate.

“Given the large number of mandates we are seeing in the sector involving PE as either vendors, investors or acquirers, it is reasonable to contend that both 2011 and 2012 will continue to see relatively high levels of deal completions,” Hart concluded.

For further information, please contact:
Helena Holm, Grant Thornton press office, 020 7728 2152, Helena.a.holm@uk.gt.com

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