Tech Report 2024

Tech Report 2024

An Offshore Team Providing Support Across The Deal Lifecycle

Dedicated Resources To Help Investors & Advisors Navigate From Sourcing To Closing & Beyond

Deal Sourcing & Origination

• CRM & Database Management

• Identifying Potential Targets

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ANASTASIA DONDE

Senior Editor

Middle Market Growth

adonde@acg.org

Picking the Winners

Tech M&A dropped significantly—especially among strategics—last year. And several prominent tech bankruptcies, layoffs and office closures weighed on the sector.

A dramatically titled New York Times feature, “From Unicorns to Zombies: Tech Start-Ups Run Out of Time and Money,” cites WeWork, Olive AI and Veep as prominent tech collapses that collected heaps of investor money over the years. By some estimates, more than 60% of tech startups fail within five years. Layoffs at tech companies are at their highest level since the 2001 dotcom crash, and even experienced workers struggle to find new jobs. According to a CNBC article in March, over 50,000 positions have been cut from about 200 tech companies since the start of the year. Large tech businesses like Amazon, Meta, Microsoft and Cisco have downsized this year. Advisors say bad news like this puts companies in a weak position to acquire when strategics are the most likely buyers of smaller tech companies.

Some say this is a contraction after technology’s expansion during the COVID lockdown years, while others think the golden age of technology proliferation is over. Another interpretation is that the industry is going through a necessary maturation. Advisors and investors Middle Market Growth spoke to for this report are scrutinizing companies’ ability to deliver profits or show a path to get there. Blockbuster growth is no longer enough. The question becomes: How do you pick the

winners—companies and subsectors that have staying power in technology? At the end of the day, investors can’t completely insulate themselves from losses, but they are focusing on promising pockets of the industry.

Advisors point to K-12 education, state and local governments, healthcare and other end markets with relatively safe budget backing as areas for technology investment and innovation. The fintech space is also ripe for a consolidation wave—one that experts expected would happen by now but stalled because of poor market conditions last year. Within SaaS and technology services, areas like supply chain management and logistics could be improved by technological solutions. And while generative AI isn’t mature enough for private equity investors, everyone is racing to understand it better and harness it within their own organizations.

Some of the bad news in technology might have investors concerned—H.I.G. Capital scrapped plans for a standalone tech fund, according to Bloomberg. At the same time, technology investing can be lucrative for experienced buyers. Thoma Bravo, a technology-focused private equity firm, returned $13 billion to investors in 2023, according to comments made by founder Orlando Bravo at a recent PEI conference.

In this sector-focused digital report, we share some of the bright spots in tech M&A, why experts think conditions are improving and how due diligence in technology is changing. //

Tech Dealmakers Tread Lightly as M&A Stabilizes

After a steep decline in deal count and value in 2023, sector experts are eager for a more fruitful market despite some ongoing headwinds.

Pent-up Energy Could Drive Fintech M&A Wave

The wave of consolidation that sector advisors expected in fintech hasn’t materialized so far, but a stabilization of interest rates and potential for synergies among strategics could finally break that dam.

The Staying Power of Technological Transformation

Investors in SaaS and tech-enabled services say these companies can help government and healthcare institutions upgrade antiquated processes, as well as solve supply chain and HR issues.

Harnessing AI in Dealmaking and Corporate Tasks

While pure-play artificial intelligence companies are too young for PE investment and mostly a strategic or VC game for now, private equity is studying how AI applications can help in M&A work or at portfolio companies.

26 Key Takeaways

Catch up quickly on some of the technology insights from this report.

CEO

Brent Baxter bbaxter@acg.org

VICE PRESIDENT, ACG MEDIA

Kathryn Maloney kmaloney@acg.org

SENIOR EDITOR

Anastasia Donde adonde@acg.org

DIGITAL EDITOR

Carolyn Vallejo cvallejo@acg.org

ASSOCIATE EDITOR

Hilary Collins hcollins@acg.org

SENIOR ART DIRECTOR

Michelle Bruno mbruno@acg.org

VICE PRESIDENT, SALES

Kaitlyn Gregorio kgregorio@acg.org Association for Corporate Growth membership@acg.org www.acg.org

ISSN 2475-921X (print) ISSN 2475-9228 (online)

Tech Dealmakers

Tread Lightly as M&A Stabilizes

It’s been a brutal year for the technology sector. Now, dealmakers are eager to get to work, but headwinds remain

BY MEGHAN DANIELS

Technology M&A has had a volatile few years. After record-high deal volume in 2020 and 2021, the second half of 2022 and 2023 served up substantial challenges. Tech deals decreased in value by 63.5% and in volume by 22.4% from 2022 to 2023, according to data from a KPMG survey. Cost of capital was the biggest factor steamrolling deals, according to the survey. Overall macroeconomic uncertainty, an aggressive regulatory environment and geopolitical unrest also contributed.

However, industry experts are cautiously optimistic about the outlook for technology M&A this year. In late February, the Nasdaq closed at a record high for the first time since 2021, bolstering confidence in the public sector that is beginning to trickle down into the private sector.

“The economy is barreling forward. We’ve been sitting in an ambiguous world for 18 months. At some point, everyone has to go to work,” says Adam Haller, partner at Bain & Co.

This is true for sell-side and buy-side players across the industry. Many aging founders of family businesses, who are already struggling with growth in the current landscape, may not have anyone from the next generation to take over and will need a liquidity event to retire. Private equity investors have commitments to LPs that

Software

M&A Deal Activity by Deal Size

they can’t put off any longer. Strategics are eager to restart their M&A strategy as equity markets rebound.

Many hope pent-up demand will help fuel a better year for deals in 2024. “We’re already seeing deals getting done. We’ve signed and/ or closed more than 12 technology M&A transactions as of the end of February 2024 and are seeing much better close rates,” says Greg South, managing director at William Blair. “A lot of funds and investors are in a good spot and recognize there’s an opportunity to deploy capital to make the math work.”

Sector Trends

Deals focused on stable markets are seeing continued attention as 2024 kicks off. “We’re seeing good interest in software deals across the board, but particularly in end markets with very safe budget backgrounds, such as K-12 education, state and local government, and healthcare,” says Jeremy Fiser, managing director at Baird. “Furthermore, we are seeing very good interest for software deals with great fundamentals (growth, profitability, retention) regardless of end market.” This focus on stability is also reflected in several of William Blair’s recent tech deals. In January, the firm represented Warburg Pincus and TA Associates in their sale of Procare Solutions, a provider of childcare management software and payments processing, to Roper Technologies for a total enterprise value of $1.9 billion. “Childcare is a durable end market—people will always have kids,” says South. In August 2023, William Blair represented Fintech, a company in the beverage alcohol payments and compliance software space, in a partnership recap with General Atlantic. “It’s another durable end market,” South says. “People will consume alcohol, though the way that they buy it and where they buy it from may change.”

Still, the software industry overall saw a decrease in both deal volume and value in 2023. According to data from Baird’s 2024 Software Outlook report, 2023 deal volume was around 22% lower than the 2021 high-water mark and 13% lower than 2022 levels, while dollar volume was 57% lower than 2021 and 48% lower than 2022. For middle-market deals, 2023 deal volume was 39% lower than 2021 levels and 19% lower than 2022 levels, according to the Baird report.

However, “both in terms of activity and anecdotally, we’re in a better setup for software now. There’s better support in the lending environment, which is providing support for M&A activity,” says Fiser. Baird’s latest software report, released in April, showed an

M&A deal count of 290 in Q1 2024, the highest quarterly figure since Q3 2022.

On the other hand, some experts predict the cybersecurity space, which has been very hot, may be headed for a decline. “Cybersecurity, especially technology around cloud security and protecting large sensitive data sets related to the emergence of gen AI, has been very active. However, as a sector overall it may be headed for a deceleration as buyers become fatigued with their cyber-spend,” notes James Brundage, Americas Strategy & Transactions TMT leader at EY.

Median Enterprise Value to EBITDA in 2021

Now, the 3.0 version of due diligence is focused not just on how this business is going to PERFORM IN THE FUTURE, but also on what the POTENTIAL SYNERGIES are with the new business and what the strategy is for how they’ll unlock those after close.

ADAM HALLER | Partner, Bain & Co.

Buyer and Seller Expectations Converge

Following sky-high valuations in 2020 and 2021, it has taken many sellers time to wrap their heads around the new normal. But 2024 may be the year that buyers and seller expectations finally come together. According to Bain & Co., strategic tech deal values have decreased by approximately 45% from 2021 to 2023—from their peak at a median 25x enterprise value-to-EBITDA values in 2021, to 13x in 2023.

“Sellers are slow to adjust their mindset in terms of what their businesses are worth, and buyers are very quick to adjust theirs,” says William Blair’s South. “But we’re seeing a return to dealmaking as the Nasdaq has recovered; the feds have signaled there will be no more rate hikes; and public market valuations are strong and healthy. Buyers are willing to pay premium prices for premium assets, while sellers, many of whom need liquidity, are recognizing that certain assets aren’t going to trade for the prices they did in 2021.”

One area where the gap may take longer to bridge, however, is with private unicorns. These companies raised a large amount of capital in prior years, and many are holding out in hopes of securing larger valuations when they do transact. “There’s a lot of pent-up activity for these private unicorns. The IPO window is open but not many people are taking it. But these companies will have to have a liquidity event at some point, so we’re bullish on the M&A outlook for the back half of 2024,” says Brundage.

Strategics Gain Confidence

As 2024 progresses, strategics are becoming more aggressive with their M&A plans. “These acquirers are feeling better about their ability to pay for businesses and make bets on sectors that are compelling to them,” says South.

For strategics in the technology space, the need for innovation is a natural impetus for M&A. Large companies feel immense pressure to incorporate generative AI capabilities into their product lines and operations. “Companies across industries have awoken to the potential for disruption that gen AI is presenting in their core business, and they know that leading-edge innovation in gen AI is going to require a set of talents and capabilities that is probably far distant from their success in the past,” says Bain & Co.’s Haller. “When you look at companies that have made a splash, they are independent VC-funded startups and smaller businesses where the risk tolerance is greater,” he adds.

Savvy strategic acquirers have also adjusted their due diligence processes to maximize their chances of M&A success, in many cases taking notes from private equity playbooks. Traditional processes focused primarily on evaluating financials, products and capabilities, quality of earnings and management. Many acquirers then evolved to consider customer feedback to inform their perspective on the future of the business. “Now, the 3.0 version of due diligence is focused not just on how this business is going to perform in the future, but also on what the potential synergies are with the new business and what the strategy is for how they’ll unlock those after close,” says Haller.

Higher interest rates make it crucial to do this planning early in order to make the deal work financially. According to a recent Bain & Co. report, the top two challenges to capturing revenue synergies in M&A deals were failure to integrate product portfolio and failure to achieve go-to-market integration and transformation. “There’s a huge premium to planning in advance so that after close you can start to put the actions in place that unlock that lever,” says Haller.

This increasingly measured and in-depth approach to due diligence applies to financial acquirers as well. “Diligence processes have extended. With less of a sellers’ market comes less of a constrained period that sellers can demand,” says EY’s Brundage.

Headwinds Remain

Although dealmakers appear eager to get back to work, fundamentals at some tech companies may not leave them in an optimal place to transact. According to a BDO survey of mid-market technology company CFOs, “41% of survey respondents say economic volatility poses a greater risk to their business in 2024, whereas only 26% say it poses less risk—a clear indication that CFOs expect these conditions to persist.”

Plans to raise capital or make acquisitions are on hold for many CFOs, according to the survey. Sixty-six percent of respondents say that they’ve stopped or slowed capital raise plans, while 54% report the same about acquisition strategies.

According to Baird’s 2024 Software Outlook, buyers are focusing more on profit than growth and scrutinizing target companies’ financials. “Buyer scrutiny on cash flow and profitability has substantially increased in light of the need to meet debt service requirements,” the report said. “In the recent past, growth had a higher correlation to value versus profitability. In the current

There’s better support in the lending environment, which is providing support for M&A activity.

JEREMY FISER | Managing Director, Baird

markets, growth plus profitability now has a higher correlation to value versus growth alone.”

What’s more, a presidential election looms at the end of this year. While advisors agree there is a backlog of pent-up demand for tech IPOs that couldn’t go public last year, the opportunity for listing this year might be short-lived. “The window for IPOs will be narrow due to upcoming elections in the U.S., the U.K. and certain other countries,” according to PwC’s 2024 Outlook for TMT

“It’s always unclear how election cycles affect the M&A market. We’re focused on company-specific dynamics instead. We can’t control the macro environment, but we can focus on company-specific trend lines to determine the right timing for deals,” says South. //

MEGHAN DANIELS is a freelance writer and editor based in Dutchess County, New York.

Optimizing Operations: Balancing human capital with technology to prepare for the uptick in deal activity

Introduction:

“From 2010, technology related deal activity grew at a 15.2% CAGR peaking in 2021 with a record 2,352 deals conducted in the year driven by near zero interest rates, a strong economy, high technology adoption and peak valuations.”

The data for the statement above was pulled from a private markets database with a few clicks, visualized using a dashboard, verified over a few web searches, and is likely being read and distributed over various communication channels, all enabled by technology. Over the last few decades, technology has not only been able to process more volume but has achieved this while reducing costs. Computing power has increased by nearly 35x from 2013 to 2023, while the cost of storing data has fallen by about ~60%1 in the same period. Technology-enabled improvement of company operations has been reflected in financial results, which in turn have resulted in high returns for private market investors due to performance-led improvement in valuations in the last decade.

Human Capital and Technology Stack

The increased attractiveness of private capital markets has led to more fund inflows into the space, resulting in exponential growth in the number of deals pursued and closed. This has also resulted in increased competition for quality assets, forcing managers to be more operationally efficient while having to collect, process and analyze more data than ever before.

While mega-funds and large advisors have access to a deeper bench and can experiment with and deploy techenabled investment support functions, those in the middle market may have to deal with significant upfront technology and human capital costs if built in-house. In a 2023 Survey, 72% of managers with over US$15b of assets under management said that they relied on technology to mitigate margin erosion, compared with only 24% of managers with under US$2.5b of assets. Investors in the middle market have generally relied on more short-term margin improvement methods. This is because of the challenge of containing technology costs, especially when the promised value is not delivered to investment teams.

The conundrum, however, is that investors and advisors reaping extraordinary profits through these investments have themselves been rather laggards in managing resources in their own operations. New and relevant technology is only one piece of the puzzle, the other and more consequential piece being the users of these tools, i.e. human capital. Many investors still use spreadsheets for investment management and while this is still ubiquitous, there are newer tools and newer skillsets developing alongside that investors and advisors need to pay attention to embrace the digital transformation of the M&A space. From CRMs to RFP tools, and data room analytics to portfolio dashboards, these tech solutions combined with the human capital provide the optimum resource combination for scaling operations.

A popular example of this is CRM deployment. While CRMs have a significant upside, the road to operational efficiency is roadblocked by the need for upfront data cleansing and continuous data maintenance. Managers typically quoted a timeframe of at least 24 months to implement a CRM while the vendors marketed a 90-day implementation period. Similar inefficiencies exist across the entire tech value chain.

It is only more likely that investment firms will continue to build their technology stack as they risk lagging behind the adoption curve. In embracing more capable technology solutions, the biggest likely obstacle then encountered is the inadequate human capital skillset to be able to fully utilize the tech tools while maintaining a solid understanding of the underlying investment strategy and business. While there may not be many studies on why technology fails in M&A, we can draw lessons from other industries, where human capability (27%) and program leadership (25%) are main reasons for failure to extract maximum benefits from technology2

Skilled Human Capital as an Answer to Technology Deployment

Technology is unique in that late movers can still catch up to early innovators by executing better. We’ve seen it in the case of Apple and smartphones or Zoom and video calling.

1 Moore’s Law, Our World in Data, March 2023

2 Digital Trends in Operations Survey, PwC, 2024

Late movers also have the advantage to learn from the mistakes of their predecessors. However, we also have the examples of companies like Blockbuster, and its failed

attempt to enter the digital streaming space. What differentiates the winners is execution.

In private capital markets, early movers gained a significant competitive advantage by deploying tools that enhanced decision-making. The advantage was absolute, as technological solutions enabled investors to look at more data and make more informed decis ions. They were able to collaborate with a larger network of individuals, both for fundraising and investment diligence, while all operational functions such as fund accounting and regulatory reporting were being automated and optimized.

We have seen technology adoption in mid-market M&A mature in recent years as a post-COVID world saw firms turn their focus inwards towards digital infrastructure and outsourcing of internal functions. Early adopter advantage has started to fade although one could argue we are still a few years away from being mainstream. This is also likely due to the dearth of talent in the marketplace that can marry technical knowledge with traditional business

A Case Study on Deal Sourcing

Technology is revolutionizing deal sourcing, especially with data scraping and dashboarding tools. Data scraping algorithms extract crucial insights from vast data sets available online, aiding in market analysis and opportunity identification. Dashboarding tools then transform this data into actionable visualizations, enabling quick decisionmaking and risk assessment. These technologies streamline communication and collaboration among global teams, enhancing efficiency in deal origination.

For example, consider a deal that comes across an investor’s radar. The target company is a D2C rental software company. As a D2C software company, customer reviews are crucial for customer acquisition. By using web scraping and APIs, a quick sentiment analysis can be conducted from different social media platforms like Twitter, Reddit, and other specific software rating websites to analyze trends and patterns in customer feedback. By

In conclusion, while technology provides data-driven insights and operational efficiency, there is still a very necessary human involvement in not only bringing

understanding, and a steep learning curve for existing employees to learn new tools.

The scope of differentiation by employing niche solutions that are firm specific still exists. “Differentiation enhancement”, an approach where technology is used to improve and scale what already works for your firm, is a common approach. For example, some PE funds outperform benchmarks due to their robust ability to drive operational results for their portfolio companies, backed by their strong operating partner network.

Human-centric digital transformation will drive results at investment firms. We believe that the right partners are the ones that can bring the right overall solution. This not only involves understanding the investment narrative, but also matching that narrative to a technology solution that helps firms be faster and more accurate, and at scale. We’ve outlined below just a few examples of how the right combination of tech and human capital can elevate different stages of the investment process.

standardizing non-structured data, investors can have more meaningful insights and deeper conversations with the management team This data can then be used to set up tiered company dashboards using proprietary scoring algorithms that rank companies based on available metrics such as employee count, employee growth, funding raised, active investors, financial metrics, to name a few. These dashboards can pull in data from public sources automatically using ETL (Extract, Transfer, Load) processes and from private sources through APIs of different databases. Visualization tools like PowerBI or Tableau then represent the processed data in an easy -todigest format. By bringing together these insights, s killed dealmakers can use their market knowledge, relationshipbuilding abilities, and strategic foresight to analyze data, negotiate deals, and deal with regulatory complexities in a more informed and timely manner

together the data, but also acting on it using qualitative judgment necessary for successful deal execution

A Case Study on Due Diligence

The drive to create more value has encouraged companies to be more data-driven with their business operations. An abundance of data residing within these companies has in turn also pushed investors to be more diligent while evaluating potential investment opportunities as well as monitoring portfolio performance. Traditionally, most investors have focused on evaluating historical financial and operational data. Today, top performing investors have been running statistical models to predict future performance as well. Typically, the responsibility of running

the analysis rests within the investment team, however, considering the quantum of data now available and the complexity of the tools used to analyze them, traditional methodologies almost become a bottle neck in the process, especially for time sensitive, high data accuracy and easy visualization analysis. The correct skillset combined with the right tech stack should be working alongside the investment teams to find “needle in the haystack” takeaways through advanced and expedited analysis.

When a potential investment opportunity has a wealth of data available, investors can leverage support to design dashboards that track and analyze financial and operational performance Findings can be presented using interactive charts that are deciphered easily and generate actionable insights. Some types of analyses include price/volume analysis, competitor benchmarking, recurring revenue analysis, and scenario simulation using statistical models. In one specific example worked on by the TresVista team, the entire process was automated and

A Case Study on Portfolio Monitoring

An effective portfolio monitoring process impacts much more than just investment performance. Portfolio data tracking impacts the fundraising channels that use this data to feed back to LPs, as well as sourcing teams that are looking for add-on opportunities. In a TresVista bi-annual survey of mid-market investors to gauge investor confidence, the amount of time spent on tracking portfolio company performance has steadily increased over the last 2.5 years3. Greater data transparency has become a key area of interest for LPs, especially with areas such as ESG requiring a more structured approach to relevant data sourcing and tracking. There are many tools available to investors that do a thorough job of portfolio reporting, though the challenges faced are usually the same when dealing with businesses in the middle market. Disparate

3 TresVista Investor Confidence Index , TresVista, 2024

significantly reduced turnaround time by 30%. Due diligence is an increasingly interesting avenue to incorporate data analytics and ML-based research, not just for analysis of historical performance but additional insights using predictive analytics. We believe leveraging such data models will very quickly become mainstream and will be a key tool for investment teams to identify high ROI investment opportunities more quickly and competitively.

data sources, unstructured data, quality of data, and reliance on manual processes impede the ability to deploy effective analytics solutions. The initial lift is therefore reliant on human intervention to gather and sanitize the relevant data, and then the software tools can provide users with the ability to look at fund level metrics like Gross and Net IRR, IRR benchmarks, MOIC, Asset valuations multiples, along with portfolio level metrics like quarterly financial statements and key operational metrics. Ease of exporting reports, cross team collaboration and scalability enable performance tracking, risk management, value creation and timely reporting. Even with software solutions in place, investment teams still require capacity to track, assess, and understand portfolio level movements, and how these insights translate to the valuation process.

Software platforms are only as good as the data that gets fed into their system. Before data from portfolio companies can be fed into the system, it must be extracted from the source, cleansed, standardized, and prepared for upload. These activities require significant human input and capacity load when executed through internal resources. The right solution can supplement these processes and

help develop customized tools for portfolio monitoring services, as provide support teams for the heavy lift around data collection and processing The goal for investors should be to have these processes running on cruise control while focusing on more critical activities such as portfolio value creation

Balancing Human Capital with Generative AI

Human skill was distinguished from previous generations of technology by last mile critical thinking. The future, however, is a little bit more uncertain as experts are developing technology to imitate human critical thinking without bias. While any comment on the future of Generative AI, or GenAI, would be conjecture at this stage, the technology as it exists today holds immense potential to redefine operations, though only when combined with the right skillset. Most opinions on GenAI center around replacing human involvement, though a more popular opinion emerging is that the rise of GenAI will lead to the development of a new skillset around human involvement to maximize the utility of GenAI. Running the right queries and understanding the uses and limitations will be paramount when leveraging GenAI. In the dealmaking space, as deal flow grows, more solutions will be built around GenAI’s capabilities, including writing emails for executive outreach, running competitor screens with

Conclusion

Technology has had a quantifiable impact on various aspects of business, including boosting revenue and improving margins. However, in today’s environment and beyond, the human capital element cannot be decoupled and is still the key component responsible for delivering value promised by technology.

analytics on product differentiation, and running industry analysis on size and projections. In our view, deal execution could move to a three-tiered model,

This model can work for the entire deal value chain, from fund raising and sourcing, to capital deployment and portfolio management, and lastly, to exit strategy.

Private capital investors and advisors will find it difficult to ignore technological advancements and equally crucial will be sourcing the right labor skillsets. To learn more about how TresVista can support your digital transformation strategy, feel free to reach out.

Pent-up Energy Could Drive Fintech M&A Wave

Experts say fintech has potential for synergies and strategic partnerships—across PE-backed platforms and corporates alike—that could drive a dealmaking burst this year

BY CAROLYN VALLEJO

The financial technology ecosystem wasn’t insulated from the widespread challenges plaguing the overall tech market in the past year. Yet as one of the relatively younger segments of the tech sector, fintech sits advantageously with dealmakers as a market with high growth potential, a need for consolidation and a newfound level of maturity that has strategics and private equity sponsors alike eager to strike deals.

That’s not to say the fintech market hasn’t been hit hard by the broader M&A slump dealmakers saw in 2023. PitchBook data reveals a 45.8% decrease in year-over-year M&A value for the sector, with 2023 clocking $28.3 billion worth of transactions, compared to 2022’s $52.2 billion. Some of the pent-up potential for consolidation could prove to be a boon to the sector this year and beyond.

Rudy Yang, senior analyst, emerging technology at PitchBook, shares an optimistic outlook for fintech dealmaking this year. “It’s been a muted few months for fintech M&A,” he says, “but there have been some bright spots in Q1.”

Those bright spots, he and other sources tell Middle Market Growth, are indicative of a more active year ahead as PE investors take advantage of long-term growth potential, and as corporates gear up to augment their service offerings through strategic dealmaking.

Coming to a (Delayed) Head

Part of fintech’s appeal to dealmakers is its diversity. “There are a lot of different subsegments within the fintech space,” notes Mike Andrusko, a partner at Centri Business Consulting and leader of its Digital Asset Practice. “You have regtech, wealthtech, insurtech is starting to get bigger, and even digital assets I would say are going to fall within the fintech space.”

In addition to those newer niches of fintech, areas like payments, banking and CFO technologies—including treasury and cash management solutions—contribute to a prolific market that has matured since its early startup days 10-15 years ago, when many of the businesses in the segment were simply “financial services companies utilizing technology” rather than genuine fintech businesses, according to Ganesh Rao, head of the financial technology and services investment group at private equity firm THL.

Rao says certain fintech niches are key to the firm’s investment strategy. Insurance technology, bank technology, and fund and wealth technology are a few focuses for THL, which also looks for fintech companies with an opportunity to embed additional financial services, like payments capabilities, within existing platforms.

Despite the sector’s diversity, dealmakers say fintech hasn’t seen the level of dealmaking activity that experts had anticipated by now.

“A lot of analysts, including myself, came into last year expecting

there to be a wave of consolidation within the space,” says Yang, who cites fintech startups taking advantage of the low interest rates and bloated venture capital funding of recent years. (2021, a banner year for fintech and private equity funding alike, saw $121.6 billion funneled into fintech startups.) “We and a lot of stakeholders in the industry expected a lot of startups to have a greater need for cash, and a lot more startup failures. What we’ve seen so far is that it hasn’t really materialized.”

Closing the Valuation Gap

According to Yang, much of the holdup of fintech M&A can be traced back to the dreaded buyer-seller valuation gap that has plagued so many industries in the last year, particularly in tech. Luckily, he says, that’s expected to ease as 2024 progresses.

And Max Heller, Centri’s managing director and leader of its M&A advisory practice, says buyers are eager to jump when sellers compromise. “We’re seeing lower valuations as an investor advantage,” he notes. “Buyers are capitalizing on that, and there’s more of a meeting of the minds.”

Overall, sector experts are confident that 2024 and beyond will finally be the time when longawaited consolidation occurs.

Rao expects Q2 to be a particularly telling period, especially when it comes to sellers’ readiness to go to market with tempered value expectations. LP pressure on PE firms to return capital should also be a driver of dealmaking activity this year, he adds.

While dealmakers don’t anticipate a wave of fintech consolidation until at least later this year, some deals are getting done. Last October, Celero Commerce, a non-bank payment processor and portfolio company of lower middle-market PE firm LLR Partners, announced its acquisition of electronic payments company Finical. A month later, PE investor Advent International revealed its takeover of U.K. payments company myPOS, valuing the company at $500 million. And in January, tech-focused PE firm Welsh, Carson, Anderson & Stowe announced its acquisition

It’s been a muted few months for fintech M&A, but there have been some bright spots in Q1.

RUDY YANG | Senior Analyst, Emerging Technology, PitchBook

of EquiLend, which provides technology to the global securities finance market processing industry.

“We’re starting to see some encouraging signs,” says Sam Ryder, a principal at LLR, who points to interest rate stabilization and projected rate cuts later in the year.

Several LLR portfolio companies completed add-on acquisitions in 2023. The firm targets growth-stage fintech companies with revenues between $10 million and about $100 million. Ryder says businesses with high recurring revenue profiles and high retention rates are the most attractive, as are the companies that can replace legacy systems in areas like wealth management, banking and payments.

The Strategic Advantage

It’s not just PE sponsors strategizing their fintech investments for the years ahead. Strategics have historically played a particularly important role in industry consolidation, with some big-ticket transactions continuing to make headlines today.

According to a recent PitchBook report, 5 of the 10 largest fintech M&A transactions since 2020 occurred in 2023 or 2024, including the $11.7 billion acquisition of financial services data vendor Black Knight by Intercontinental Exchange in September, as well as Nasdaq’s November acquisition of Adenza, a financial services risk management and regulatory reporting

THL, says Rao, also seeks non-cyclical companies, ideally in end markets where software and technology penetration are in their earlier stages of long-term penetration. Most importantly, he notes, is the health of the end-customer. Fintech companies servicing small community banks, for example, warrant a bit more caution at this time.

Fintech M&A activity

Source: PitchBook, Geography: US and Canada, *As of December 31, 2023

PitchBook data reveals a 45.8% decrease in year-over-year M&A value for the fintech sector, with 2023 clocking $28.3 billion worth of transactions, compared to 2022’s $52.2 billion.

According to PitchBook’s Financial Fusion: Fintech’s M&A Landscape Unveiled report, 5 of the 10 largest M&A transactions since 2020 occurred in 2023 or 2024.

Top fintech M&A and buyouts by deal value from 2020 to 2023*

Company Close dateDeal value ($M)Deal typeInvestor(s)/aquirer(s)Segment

Black KnightSeptember 5, 2023$11,700.0M&A ICE

Adenza November 1, 2023$10,500.0M&ANasdaq

Avalara October 18, 2022$8,400.0Buyout/LBOAres Capital Corporation BDC, Vista Equity Partners

Coupa February 27, 2023$8,000.0Buyout/LBOAbu Dhabi Investment Authority, CapitalG, General Atlantic, Thoma Bravo

Credit KarmaDecember 3, 2020$7,100.0M&AIntuit

EngageSmartJanuary 26, 2024$4,000.0Buyout/LBOVista Equity Partners

Financial services infrastructure

Capital markets

CFO stack

CFO stack

Wealthtech

Financial services infrastructure

EVO PaymentsMarch 24, 2023$4,000.0M&AGlobal Payments Payments

Adenza July 22, 2021$3,750.0Buyout/LBOThoma Bravo

Verafin February 11, 2021$2,750.0M&ANasdaq

Bottomline Technologies May 13, 2022$2,600.0Buyout/LBOThoma Bravo

company, for $10.5 billion. (Adenza was acquired from its previous owner, software-focused private equity firm Thoma Bravo.)

Although dealmaking by strategics in the middle market is more muted, there are opportunities for synergies and partnerships, experts say.

According to Centri’s Andrusko, much of the inertia behind fintech M&A this year and beyond will lie in identifying growth potential, from strategics and PE-backed platforms alike.

“There are certain companies that may not necessarily have a license, so instead of going through the application process, they may go through an acquisition to get into a company that already has that infrastructure to help them save some time, effort and money,” he says.

“I bet you’re going to see more strategics partnering up and identifying potential targets,” predicts Heller. “Probably a trend for ’24 is more strategics at play—but that could be private equity-backed platforms doing add-ons, too.”

Capital markets

Regulation technology (regtech)

Financial services infrastructure

Source: PitchBook, Geography: US and Canada, *As of December 31, 2023

I bet you’re going to see more strategics partnering up and identifying potential targets. Probably a trend for ’24 is more strategics at play—but that could be private equity-backed platforms doing add-ons, too.

MAX

Yang similarly highlights the value in strategic partnerships within the fintech ecosystem, not only to consolidate a fragmented market and weed out the winners from the losers, but to enable companies to enhance and augment their existing offerings. With business and consumer end-customers demanding holistic, seamless products, industry collaborations can help banks, corporations and other industry mainstays expand into new geographies and add product functionality—injecting meaningful revenue into the business as a result.

That demand lends itself well to M&A, particularly as the fintech ecosystem matures. “You’ve reached this point in fintech where bank incumbents, large corporations and startups are all more ready than ever to partner with each other,” says Yang. //

HELLER | Managing Director and Leader, the M&A Advisory Practice,

Centri Business Consulting

CAROLYN VALLEJO is Middle Market Growth's digital editor.

The Staying Power of Technological Transformation

Investors and advisors say SaaS and tech-enabled services businesses are helping companies upgrade antiquated processes or solve new problems

BY ANASTASIA DONDE

The concept of digital transformation might sound like a tale as old as time, especially after the COVID-19 pandemic made companies rush to do business virtually. But sector advisors say this work is not done. There are many industries that still operate with antiquated processes, as well as sectors whose inefficiencies were revealed during the pandemic, that can benefit from digital upgrades.

Tech-enabled services companies and SaaS (software-as-a-service) businesses have jumped into that fray, helping upgrade old-fashioned ways of doing business or solve emerging problems.

Sector advisors point to healthcare, government services and human resources management as some areas where technology services—either as a software product or an outsourced service provider—can help upgrade old systems. Supply chain, transportation and logistics, meanwhile, are areas that were weakened by the pandemic and lockdowns, and now benefit from technology upgrades and digital processes.

“There are certain end markets that are realizing using old software or none at all doesn’t cut it anymore,” says Jeremy Fiser, managing director in Baird’s Technology & Services Investment Banking Group. “There are a lot of different opportunities in underserved or underrepresented markets like schools and municipalities that are working with outdated software.”

Adrian Guerra, partner at Houston-based lower middle-market firm Capstreet, agrees that some industries are behind in adopting technology solutions. “We see opportunities in various areas that were previously laggards in adopting technology,” Guerra says. “Software and other technologies are becoming more accessible to smaller

It used to be that companies could have lots of growth and no visibility to positive EBITDA, but that’s changing.

ADRIAN GUERRA | Partner, Capstreet

companies as costs come down as a result of cloud computing and other advancements.”

Government Software and Other Pockets of Activity

Multiple sources say that government entities, particularly state and local governments, have historically been behind on adopting technology-driven processes. That’s starting to change.

Government IT M&A Softens Amid Broader Market Decline in 2023 Number

There are certain end markets that are realizing using old software or none at all doesn’t cut it anymore.

JEREMY FISER | Managing Director, Technology & Services Investment Banking Group, Baird

“Legal and government services solutions businesses have historically operated with heavy reliance on people and paper,” says Josh Koplewicz, managing partner at Thayer Street Partners, a New York-based lower middle-market private equity firm. “As they transition to the cloud and more software systems, it creates opportunities that we’re monitoring.”

One of Capstreet’s recent acquisitions was the purchase of PlanetBids, a provider of e-procurement SaaS solutions. Headquartered in Studio City, California, the company aims to streamline the procurement process for government agencies, nonprofit organizations and educational institutions.

The bid management process is often cumbersome for government entities, Guerra explains. They must run public processes that are subject to strict regulations and periodic audits when seeking service providers. PlanetBids helps its clients organize their processes, communicate with all stakeholders and keep them compliant.

Baird’s Fiser says local government entities in particular stand to benefit significantly from digital transformation, an area that has seen some recent deal activity. Multiple companies in this space have seen deals so far this year, including OpenGov, SmartGov, JJR Solutions and Finvi.

Elsewhere, business challenges that arose during the COVID-19 pandemic and its aftermath are additional targets for modernization efforts, says Fiser. Addressing labor shortages, managing global or remote workforces and making supply chains more resilient are just a few spots benefiting from technology improvements.

Legacy solutions in supply chain management aren’t as effective anymore. “An increasingly interconnected global supply chain necessitates modern solutions that can digest and provide actionable, real-time insights,” says Andy Livadariu, managing director in Baird’s Technology Group. “Supply chain visibility solutions that allow organizations to respond proactively and with agility will see tremendous investment interest.” In October, UPS announced plans

to buy Happy Returns, a software and reverse logistics company that offers frictionless returns for merchants and customers without needing boxes or labels. Other strategic investors like Blue Yonder and Optilogic have been active in the area, too.

The Services Focus

Bona fide technology investors are often looking to parse what’s a “true tech company” and what’s just masquerading as such. For some, that distinction doesn’t matter. “Everything is becoming tech-enabled,” says Thayer Street’s Koplewicz.

Thayer Street targets B2B business services, financial services and real estate services companies where technology is being used to upgrade old processes. The firm’s portfolio company Grove Point Marinas, a holding company that acquires and operates marinas around the country, has acquired assets in 10 states since coming under the Thayer Street umbrella in 2021. Koplewicz says the company is now using digital tools to improve the experience of its customers and employees. In February, Thayer Street was on track to invest in a hybrid software and services business in the real estate space.

While SaaS investors usually focus on software as the main product, firms that target “tech-enabled services” are often talking about companies that offer an outsourced service where technology and digital upgrades are part of the equation. Trent Hickman, managing director at VSS Capital Partners, thinks of them as businesses that use “people, process and technology to outsource a business function and do it faster and cheaper than in-house.” This could mean outsourcing HR, finance and accounting, or IT services to a third party.

New York-based VSS, which invests in lower middle-market companies via equity and credit, targets founder-owned tech-enabled services companies that have 60%-80% recurring revenue streams.

Last year, the firm reinvested a minority stake in GreenSlate, a tech-enabled provider

of payroll and accounting services for the entertainment industry. VSS’ portfolio company Quattro Business Support Services, which offers cloud-based accounting and payroll services and other business outsourcing functions, bought Robust Network Solutions, an outsourced managed IT provider, early last year.

Evaluation and Valuation

Valuation multiples in technology have historically been high, and several sources say they haven’t come down much in the last year. That’s because it’s mostly high-quality assets that are trading. “The best SaaS companies are still trading in the high single-digit or low double-digit revenue multiple area,” Baird’s Livadariu says.

VSS’ Hickman agrees that only top-quality assets have been trading lately, which makes valuations look high. In the tech-enabled services space, he’s seen some come down to the 10x-12x EBITDA range, while it would have been 14x-15x two years ago.

Global Deal Volume in Software & Tech-Enabled Services

Source: PitchBook and R.L. Hulett

Capstreet’s Guerra says he’s seen no or very low discounts on the top-quality SaaS companies that are selling. Sources say it’s when the B or C assets start trading that valuations will likely come down.

While buyers are increasingly scrutinizing tech companies more for being able to deliver profit, not just high growth, Livadariu says acquirers will still look at break-even companies as long as they’re capital efficient. Fiser adds that the focus on profit is the knock-on effect of high interest rates and companies having to service more expensive debt loads.

“Investors used to reward companies for high growth and no profitability,” says Capstreet’s Guerra. Now they are looking for profitability or at least a path to get there, so they have it at exit. “It used to be that companies could have lots of growth and no visibility to positive EBITDA, but that’s changing.” He notes that the Rule of 40, a common principle in SaaS investing that says a company’s combined revenue growth rate and profit margin should equal or exceed 40%, “is becoming the Rule of 50 or 50+.”

Despite a lot of the themes underpinning activity in the technology services space, deal volume was down across the board last year. The number of government IT services transactions fell to 91 in 2023 from 112 in 2022, according to Capstone Partners research, for example. Deals for software and tech-enabled services overall declined to 3,578 in 2023 from 4,650 in 2022, according to PitchBook data compiled by St. Louis investment bank R.L. Hulett.

Investors say they are seeing signs of improvement so far this year. “Generally, there are a number of signs that the market is firming up a little bit and we might get some interest rate cuts,” says Hickman. “More companies are coming to market and there is a gradual improvement in conditions. But it won’t be like we flip a switch and go back to 2021.” //

ANASTASIA DONDE is Middle Market Growth's Senior Editor.

Harnessing AI in Dealmaking and Corporate Tasks

While investing in pure-play AI companies might be a strategic and VC game for now, private equity firms are studying AI applications at portfolio companies and implementing new tools in their own dealmaking work

BY BRITT ERICA TUNICK

Artificial intelligence and generative AI have moved from futuristic sci-fi ideas to real-world technologies at warp speed. While private equity firms are largely taking a wait-and-see approach to AI investments, they’re keeping a close watch on developments and have begun taking advantage of the new technology in their work.

“AI is a broad subject and we are in the beginning days. … Everyone knows it is going to have a strong impact, but the question is which one and who will be the winner?” says Francois Jerphagnon, head of expansion for European private equity firm Ardian. He likens the current state of AI to the early days of the internet, when it was all but impossible to determine who the winners would be among early entrants such as Netscape, the dominant browser at the time. “In the late 1990s, Yahoo was the name, but today who remembers Yahoo? There can be pitfalls to investing too early,” says Jerphagnon.

While there is no shortage of money heading into AI-related businesses, so far, the largest inflows have been from large technology companies like Amazon, Apple and Google. Industry participants say there is good reason for that: AI technologies are in a nascent phase where the building blocks for future applications are still being laid, and it remains unclear how many emerging AI applications will ultimately be monetized.

“Private equity likes to see proven technologies. They want to find predictable and profitable revenue production. A lot of the AI investment today is in companies that are still experiencing cash burn but have high promise,” says Travis Drouin, head of Baker Tilly’s technology industry practice.

Many PE firms are waiting for pure-play AI companies—those where AI is ultimately the end product—to mature before investing. But companies that leverage AI to help solve specific problems are already generating significant interest and are expected to represent the initial wave of PE investments.

“I think about AI not as something to invest in directly but rather an overlay that impacts how we think about our investment theses, how we think about different end markets and the durability of those markets,” says Jon Nuger, a managing director and member of the technology team at

Generative AI-related risks that organizations consider relevant and are working to mitigate, % of respondents1

AI Use Intensity and Testing Rates by Sector

A lot of the AI investment today is in companies that are still experiencing cash burn, but have high promise.

TRAVIS DROUIN | Partner, Baker Tilly

Berkshire Partners. “For us, the questions are: which sectors or companies are more or less likely to be impacted by AI, and what are the ways we can be harnessing AI in a portfolio company value creation context?”

“AI is evolving—across every industry and every company, from law firms to banks. … Everyone is sorting through it and trying to think how to harness it, and nobody wants to be left out,” says Tim Poydenis, co-head of the emerging companies and venture capital practice at law firm Holland & Knight.

Note: These figures visually represent the weighted share of firms that indicate intensity of use of at least one of the following business technologies: Automated Guided Vehicles, Machine Learning, Machine Vision, Natural Language Processing or Voice Recognition.

High intensity corresponds to respondents utilizing at least one of the AI-based business technologies “In use for more than 25% of production or service.” Medium intensity corresponds to “In use for between 5%-25% of production or service.” Low intensity corresponds to “In use for less than 5% of production or service.”

Source: “The Who, What and Where of AI Adoption in America” published by the MIT Sloan School of Management.

According to a February research report penned by academics from several universities and published by the MIT Sloan School, the manufacturing, healthcare and information sectors have been the biggest users of AI tools so far.

The Path to Maturation

As VCs and PE firms race to weed out the most promising players in AI, it is the “tech enablers”—infrastructure and support companies, and those with tangible products—that have been attracting initial investments. One example of the latter is Locus Robotics, which specializes in autonomous mobile robots for warehouses. The company recently landed an $8 million investment from Canadian public company Stack Capital Group. Another example industry participants point to is Nvidia, a publicly listed company that has seen its value nearly quadruple. Nvidia provides support for AI technology and the internet of things.

I think about AI not as something to invest in directly, but rather an overlay that impacts how we think about our investment theses, how we think about different end markets and the durability of those markets.

JON NUGER | Managing Director, Berkshire Partners

One factor that will determine when PE firms begin actively investing in AI is the size and maturity of companies in this space. “For AI companies, transitioning to traditional PE often involves achieving annual revenue targets of $20 million to $50 million, maintaining consistent growth rates and demonstrating profitability or a clear path to profitability,” says Kevin Baragona, founder and CEO of DeepAI, a company specializing in online text-to-image generation. “Once these milestones are reached, they become attractive candidates for PE buyouts or growth equity investments.”

Another consideration that will keep investors engaged in this space is the increasing demand for all things AI. “In our recent survey, 70% of executives said that AI is going to affect their business and it’s going to drive their business innovation over the next few years,” says Kevin Desai, a partner and private equity lead at PwC.

AI Use in M&A Work

While investing in pure-play AI companies might be premature for private equity firms, many have begun using AI to assist with dealmaking efforts. According to a recent SS&C Intralinks survey, 93% of the 300 corporate and private equity dealmakers polled said they anticipate increased use of AI tools in the M&A process.

Socratics.ai is a data and AI platform that can automate as much as 70% of deal execution, from pitch decks and financial modeling to company research and strategic positioning. As the company seeks funding from the VC and PE communities, Tim Eun, founder and CEO of Socratics.ai, has become well versed in both industries’ early usage of artificial intelligence. Though many organizations are only beginning to dip their toes into utilizing AI in-house, Eun says that “up to 90% of analysts are already using ChatGPT privately outside company policy. They’re inputting the description of a company and having it write a script that they can then put in their own voice into pitch decks.”

In cases where PE firms are actively embracing AI tools to help automate tasks such as filtering data, the technology is already having a significant impact on M&A workflow, and industry experts predict this will only increase. In many cases, it is already being used to help identify promising investment opportunities by tracking factors including hiring trends at job websites to identify companies that are expanding.

Philipp Krohn, a partner and CEO of Alantra US, says that advanced analytics are already yielding benefits in M&A processes, including identification of new revenue sources, deal sourcing, due diligence, valuation and negotiation. “As the technology continues to evolve, we anticipate broader adoption of AI in M&A processes, leading to a more efficient and effective industry,” says Krohn. “At Alantra, we have already initiated AI-driven processes to comprehensively analyze the information stored in our knowledge center.”

Last year, the tools helped Alantra track over 46,000 interactions, analyze 5,000 meeting notes, and reach over 1,000 potential buyers. Krohn adds that AI is not only transforming how deals are done, it is changing the M&A opportunities pursued by the firm’s clients.

Still, while the PE industry already sees the benefits of using AI for its own workflow, industry experts are well aware of the risks of unknown biases within algorithms and hallucinations (false information generated by the large language models that power AI chatbots and algorithms). According to a 2023 McKinsey & Co. report, inaccuracy, cybersecurity and intellectual property infringement are the top risks cited in generative AI adoption.

While there is quality data flowing into AI, experts agree these engines don’t have the level of accuracy necessary to replace the role of analysts and likely never will. “There will still be the need for a human, and a very qualified human, to make the judgment at the end of the day,” says Ardian’s Jerphagnon. //

BRITT ERICA TUNICK is an award-winning journalist with extensive experience writing about the financial industry and alternative investing.

Key Takeaways

CATCH UP QUICKLY: From strategic partnerships in fintech to new AI that can help M&A practitioners write pitch decks, here are a few highlights from Middle Market Growth’s tech report.

The Hopeful Unicorn

Historically sky-high tech deal valuations could be keeping M&A volume down in the sector. Experts say that’s starting to change, and some sellers are recalibrating their expectations to the new normal. An area where the valuation gap might take longer to bridge, though, is with “private unicorns.” These companies raised a large amount of money from VCs in previous years and are still holding on to hopes of larger valuations in an IPO or a sale. “The IPO window is open, but not many people are taking it. But these companies will have to have a liquidity event at some point, so we’re bullish on the M&A outlook for the back half of 2024,” says James Brundage, Americas Strategy & Transactions TMT leader at EY. “Tech Dealmakers Tread Lightly as M&A Stabilizes,” p. 4

Strategizing Synergies

Deal potential in the fintech space this year could be a matter of strategics pursuing acquisitions to unlock synergies. Some companies might look to acquire another company to obtain new licensing they don’t already have in-house. Other corporations, banks or insurers could be pursuing deals to get into new geographies or gain a product functionality, according to sector experts. “I bet you’re going to see more strategics partnering up and identifying potential targets,” says Max Heller, managing director at Centri Business Consulting. “Pent-Up Energy Could Drive Fintech M&A Wave,” p. 14

Uncle Sam Needs Help

Investors and advisors in tech-enabled services say government agencies—particularly state and local government—often operate with antiquated systems and technology that could benefit from the streamlining of new software programs. To that end, Capstreet recently invested in PlanetBids, a company that helps government agencies, nonprofits and educational institutions ease the procurement process in areas where it needs to be public, regulated and uniform. “The Staying Power of Technological Transformation,” p. 18

The Robot Philosopher

Even though private equity firms are just starting to formally use AI in-house, Tim Eun, the founder and CEO of Socratics.ai, says many firms are already experimenting with these tools in private. His company is a data and AI platform that can automate as much as 70% of deal execution, including pitch decks, financial modeling, company research and strategic positioning. “Up to 90% of analysts are already using ChatGPT privately outside company policy. They’re inputting the description of a company and having it write a script that they can then put in their own voice into pitch decks,” he says. “Harnessing AI in Dealmaking and Corporate Tasks,” p. 22