Technology, technology everywhere

Stellar returns have driven a huge amount of capital to technology-related investments.

In case you missed it this week, the private equity industry gathered more capital in the first half of 2017 that it has in any six months since we started tracking the quarterly data.

Naturally there was a clutch of mega-funds contributing to this grand total (and to the largest average fund size at $716 million). And the second-largest of these mega-funds was technology investor Silver Lake’s $15 billion fifth fund.

It is not new to see the firm among the industry’s biggest fundraisers. Its previous generation fund was a giant and, at $10.5 billion, was the largest private equity fund to focus on technology-related investments raised until… Silver Lake’s latest fund.

However, it does highlight yet again the increasing prominence of tech-focused private equity.

Silver Lake is not alone. Of the $264 billion raised across the entire private equity universe, 12 percent of this – circa $33 billion – found its way into TMT-focused funds, according to our data. That is roughly equivalent to the total amount raised for equity investment in infrastructure globally (and the infrastructure figures were boosted by a record-breaking $15.8 billion Global Infrastructure Partners fund).

That $33 billion for technology investment sounds even more dramatic when we consider what has been left out. Vista Equity Partners has, we understand, as good as raised its $10.5 billion sixth fund without having held a formal final close. Meanwhile, Japan’s SoftBank held a first close on its game-changing mega-fund on $93 billion in H1 on its way to its $100 billion target. Neither will show up in the data until they hold final closes.

What has driven institutional capital towards this strategy? One word: performance.

Tech sector buyouts since 2007 have generated a mean gross IRR of more than 25 percent, according to the CEPRES platform, which allows GPs and LPs to exchange confidential performance data. The equivalent figure for buyouts across all sectors was just shy of 19 percent. The difference is impressive.

The question on everyone’s lips, though, is repeatability and whether the ‘too much money, too few deals’ maxim will apply more readily than it already does to technology-focused funds.

It is a tough one to answer – and not one we will manage here – but there are a couple of key points to factor in.

The first is what we wrote about last week in terms of shrinking public markets. The public market investor’s loss is the private equity investor’s gain when it comes to increasingly sizeable dealflow (for example, in last week’s Visma buyout).

The second is that to describe ‘technology’ as a sector is, at best, to capture a very broad church of investment strategies and, at worst, to mislabel it as a sector altogether.

A relatively small but important fund close last week – Munich-based EMH Partners’ €350 million Fund II – illustrates the point. EMH is a devoutly digital private equity firm: it was established by two brothers, young serial technology entrepreneurs, in 2010. It is not, however, searching for tech companies as we know it, but for traditional SMEs with “great potential for growth and digitalisation”. Instead of start-up, think German Mittelstand stalwart. In a sense, the less digital the business, the better in terms of target company.

In other words, the tech sector is bigger than we think. LPs may be banking on this.