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COVID-19 driving more investment in digitization, fintech, PE firm says

➤ The early COVID-19 impact on private equity deal flow is receding, leaving companies and investors looking for opportunities.

➤ FTV views enterprise software and financial technology as long-term growth areas that can weather short-term cycles in the economy.

➤ Investors are optimistic that economic fundamentals are sound, and the economy will return on an accelerated basis in many areas.

Founded in 1998, private equity firm FTV Capital pursues a theme-based growth strategy, focusing on high-growth companies in the enterprise technology, financial services, and payments and transaction processing space. It has also cultivated a Global Partner Network, a range of large financial services companies and individual investors, that can connect with FTV's portfolio companies to solve potential problems or fill outstanding needs.

In the equity markets, enterprise software, cybersecurity and financial technology have thrived during the COVID-19 pandemic as companies accelerated their digitization efforts, and remote communications as well as payment processing saw heightened demand. FTV Capital recently closed a $1.2 billion fund, its sixth fund, despite the recession and uncertainty gripping many sectors.

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Liron Gitig, Partner, FTV Capital
Source: FTV Capital

S&P Global Market Intelligence spoke to Liron Gitig, a partner at FTV responsible for leading investments in enterprise technology, to discuss the trends impacting the firm and the financial services sector more broadly. What follows is an edited version of that conversation.

S&P Global Market Intelligence: How is the current recession impacting FTV and private equity's role in the recovery?

Liron Gitig: In the very short term, there are disruptions, and it is sometimes harder for those companies to focus on signing new contracts with vendors. But in the medium term, a lot of these things we've identified as attractive long-term trends are actually getting more priority and getting accelerated demand. I think that's really going to be beneficial, and private equity's ability to take a slightly longer-term view allows us to support companies in a different way that I think is really beneficial in this type of environment.

Can you provide any specifics or nuance?

Digitization and digital transformation — those are words you hear a lot about. They are long-term trends we have invested against for years. But within that, if you look at some of the disruptions that have happened because of the COVID era, it's changed the ways people think about interacting. For example, people are realizing that they are going to increasingly be interacting with their customers and their partners within a much more digital paradigm. How do you understand and measure that experience? How do you improve and manage that across multiple digital channels? So while in the very near term, there have been some slowdowns and disruptions, 12 months from now, I believe people will be spending on some of that more than they otherwise would have.

Specifically, we invested in a company called Inc. a few years ago in the digital identity space, which is all around understanding who your potential customer is and how to transact with them. Their business is seeing a significant acceleration in this time period because of the obvious need to understand and manage customers' interactions online. We recently invested in a company called Docupace Technologies Inc. Docupace is a development platform focused on onboarding advisers and clients to a financial institution. That is another area that has been massively accelerated, because whether it's your customer or employees, you need a better way to onboard them and offer them goods and services in a digital world.

Our data shows private equity has absorbed an outsized slump in deal activity. What's been your experience?

This is something that in many respects is very firm-specific. We spent a lot of really intensive time advising our portfolio companies and helping them think through how to manage this environment. Fundamentally, they're mostly very healthy and that frees us up to commit our resources to looking outwards instead of inwards. Our advising was on how to manage these challenges, not how to deal with a business that's suddenly shrinking or going away. That has left us free to look at new investments.

The deal flow has trended toward add-ons rather than entries, and it's been a difficult environment for returns on exits. How have you seen that play out?

This is obviously a very dynamic environment and it's changing very rapidly. When some of these COVID impacts started to be felt, a lot of people started to pull back from this market. Many of them said, "Hey, I'm not sure now is the right time to be talking to investors." Now that has settled down. I think companies have realized they can execute through this challenge. I think they've realized that there are good investors out there, particularly ones who are thematic-focused. Ones who understand their fundamentals who are willing to engage with them in ways that are productive, as opposed to those just looking for a good deal. So I think the deal flow has come back, and there are companies that are willing to have conversations.

Have you seen this period start to generate opportunities on valuation?

I definitely think there are opportunities out there. If you're a company in this environment you might say, "We are actually executing pretty well, and we have competitors that are unfortunately struggling more. Now may be a good time to accelerate our investment." We see companies seeking capital for that. Things like that really create opportunities. Given the uncertainty, though, people just don't want to take as much leverage or put a lot of leverage on a company.

How do you think about the disparity between stock returns and the weakened consumer economy?

Clearly there are different things going on to support stocks as an asset class. I think what people are fundamentally saying right now is they don't believe the long-term impact to economic growth has been compromised. There is a lot of debate on this and there is a very painful dislocation that is unfortunately impacting millions of people. But fundamentally, when the underlying economy comes back, there is a good chance it will come back in an accelerated way.