Private equity has not always been in love with the technology sector. A few decades ago, tech deals were considered a poor bet for private equity firms. Ideas were not thought to outweigh physical assets as an investment opportunity.
But things have changed – technology is a hot investment opportunity for firms, with many of them looking hungrily for more.
Paving the way
Things started changing in 2003 when one of the world’s first technology-focused private equity firms started operating. Silver Lake Partners dedicated it to investing in technology, paving the way for other funds to follow. Jim Davidson, a founder of Silver Lake Partners, believed the time to be right for more tech investment. Davidson said in an interview, “Now people are saying they’ll never invest in technology again. That’s just crazy. It’s silly to think businesses won’t want to differentiate themselves. And technology is the way to do that.”
Since starting, the firm has succeeded with its investment in Seagate, Skype, Alibaba and others. According to the New York Times, Silver Lake Partners is currently looking to raise a $15 billion fund.
Silver Lake Partners is not alone now in searching for the right deals. Data by PitchBook suggests around 20% of private equity deals in the country are made in the tech sector. Furthermore, some of the best-performing PE firms have a technology focus.
A perfect example of this is Vista Equity Partners. Vista’s focus has been on reviving old software companies, such as Bullhorn and Greenway. The strategy has worked – the firm has averaged returns of over 20% with its deals.
Eyes turning to fintech
Now, it seems the focus is shifting again and the fintech sector is building up its prominence within the wider tech sector. The key here for private equity firms is the state of regulations.
So far, the US regulatory landscape looks unsettled. Aaron Cutler, an associate at Hogan Lovells, wrote in a Banking Technology post the problem is the lack of appropriate countrywide response. “Federal financial regulators are all addressing fintech issues in different ways and the efficacy of some approaches remains to be seen,” Cutler wrote.
Proposed legislation is, however, in the pipeline and US regulation is likely to implement the so-called sandbox approach. This is already being used in Singapore and Hong Kong. Under the model, fintech can provide its product or service to a limited audience for a certain time before regulatory compliance and licencing kicks in.
A recent Forbes article listed fintech as one of the top booming industries of the era. Steve McLaughlin, a founder and CEO of FT Partners, said in the article, “There really is no area of the enterprise that is not being addressed by FinTech innovation, as businesses leverage technology to decrease the financial-related friction in transactions with other businesses”.
The sector is undoubtedly going to lure in more private equity investment. The strength of the sector has grown over the years and the transformative power of technology will keep private equity investors hungry for more.