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Investment Banking: The Outlook, Market Share and Competitive Advantage

PE makes beeline for tech assets in bid to recession-proof portfolios

The technology sector is expected to see the greatest private equity deal activity in 2020, as investors flock to defensive strongholds in an effort to make them resistant to recession, according to the first BDO U.S. Private Capital Outlook.

Just over half of private equity firms and venture capital firms, 54% and 51% respectively, polled by Rabin Research Co. in October, said transactions in the sector are most likely to increase in 2020. Firms are particularly interested in 5G technology and artificial intelligence, with internet of things; robotics; and extended reality, which includes virtual, augmented and mixed realities, also likely to see increased investment interest.

SNL Image
Visitors stand near a 5G logo at a display for Chinese fiber-optic cable maker YOFC at the PT Expo in Beijing.
Source: AP Photo

The outlook builds on traction in the sector this year, when it accounted for over one-third of all U.S. private equity deals. Recurring revenue from the software-as-a-service model has been a major draw to private equity firms.

"Private equity investment in the technology industry reflects both reality and optimism: Reality in that the tech sector is responsible for a significant percentage of overall growth in the economy, and optimism that the sector will remain a long-term driver of sustained growth," Aftab Jamil, partner and national leader of BDO's technology practice, said in the report.

Survey respondents also anticipate increased investment activity in the energy and natural resources sector in 2020. In particular, climate change, responsible investing and higher power capacity are expected to drive interest in renewables, while the oil and gas sector is considered ripe for consolidation, the report noted.

An uptick in deal activity is forecast in a third sector, financial services, which is considered a countercyclical asset class. Wealth management businesses are of particular interest to private equity firms, given their good cash flow, the potential for consolidation in the space and ample exit opportunities.

Barriers and drivers

Survey respondents view increased competition as their biggest obstacle to closing deals and investments, with strategic buyers and hedge or mutual funds cited as their top rivals. Gaps between buyer and seller valuation expectations, and risk exposure uncovered during due diligence, are the two other primary deal closing challenges identified.

Distressed businesses are likely to present investment opportunities over the next 12 months, with 40% of private equity firms and 39% of venture capital firms considering it one of the top three key deal flow drivers.

In terms of geography, the Asia and Southeast Asia region is expected to have the greatest investment opportunity outside of North America in 2020, with 30% of private equity firms and 29% of venture capital firms identifying it as their first choice. The region takes the second spot from continental Europe.