Technology-Driven PE Opportunities Abound | Institutional investor


After generating strong returns in portfolios for more than a decade, technology companies have recently struggled. With the Nasdaq 100 falling more than 25% in the first six months of 2022, many investors are looking to reduce their tech exposure as they build defensive positions against a general market downturn. But not all news from the tech space is bad, as a specific niche in private equity is well suited for sustained potential growth, even in a recession.

Private debt markets are robust

For starters, the private equity market, as a whole, is giving investors much-needed optimism and shelter. “The private debt situation is strong and our market growth has accelerated,” said Matt Fleming, managing director of Antares Capital. With rising rates and greater volatility, investors are looking for private debt investments at floating rates to protect their portfolios, he notes. But beyond serving this defensive purpose, a technology-focused private equity strategy can also be a driver of growth.

“Tech-focused private equity strategies are holding up even with declining public valuations and in some cases creating more opportunities for these private equity strategies,” he says. “The current environment has created a significant number of private opportunities that previously would not have been available. Some of them have already been announced, and we expect several more before the end of the year.

Consider B2B software

When it comes to targeting a technology niche in the private equity market, Fleming says B2B software vendors offer particularly attractive opportunities for institutional investors. “At Antares, we focus on software companies that have business customers rather than consumer end markets,” he says. Recent price declines in the technology sector have primarily affected companies with large consumer end markets, he notes, while mid-sized software companies in the B2B space have not experienced these. drop levels.

“When it comes to the inflationary and potentially recessionary environment, B2B software companies are more isolated than the broader market,” says Fleming. They’re seen as far less vulnerable to supply chain issues or rising labor costs, and they can also pass on increased spending to their captive corporate customers, he says. “These companies have recurring revenue, strong retention and stable free cash flow – and we expect many to thrive in downturns, just as they did during times when the market was strong,” adds Fleming.

Fleming also expects software finance structures to do quite well during a recession. “One of the main reasons is that sponsors have a lot of skin in the game with these companies, so both sponsors and experienced direct lenders have a good incentive to cooperate and resolve any issues that may arise in the event downturn,” he said. Although leverage has increased in recent years, he notes that the average purchase price multiple for B2B software vendors has grown at an even faster rate. “We’re starting to see signs of lower buy price multiples in our broader new opportunity pipeline, but less so with software, where the average buy price multiple for deals we’ve funded recently is on average about 20 times,” says Fleming.

Big benefits in the middle market

Antares has a strong focus on middle market private equity investments, and they are proving resilient under current conditions. “In the middle market, we don’t see valuations moving,” says Fleming. While they could change at any time, “there’s so much dry powder on the sidelines from our sponsors, even they say valuations aren’t moving.”

Additionally, the mid-market tier offers inherent advantages that make B2B software vendors even more attractive, says Fleming. Unlike startups, these companies have demonstrated models and sufficient scale. And, just as important for the private equity market, their management teams are also much more accessible than those of big tech companies, giving lenders greater leverage to chart the way forward.

“Middle-market private equity is a very relationship-oriented place, and at this size we can really drive the talks, especially since we drive the majority of the deals we do,” says Fleming. Such qualities – along with the strengths of B2B software vendors – put them firmly in the ideal position for Antares, he says, allowing the company to drive private equity deals that still have the scale to be. attractive. In contrast, large tech companies often have deals involving ten or fifteen lenders, with no one taking the lead.

It is essential to be selective

“We engage with only about 25% of software vendors who walk through our doors,” notes Fleming. “As a relationship-oriented lender, we want to choose really strong businesses that we want to finance in good times or bad.”

Additionally, Antares only funds companies backed by sponsors and works closely with those sponsors, he says. “We’re going to be consistent and reliable in our relationships with sponsors, and they know that even if the market goes through tougher times, we’ll be there for them on the assets we love.”

Play offensive, not just defensive

Rather than just taking defensive action, institutional investors are now continually asking Antares how they can capitalize on the current market to find opportunities, Fleming says. “They always want to deploy money, make money and go on the attack,” he notes, and many have a good understanding of how mid-tier B2B software companies are ready to go. outperform, although – like the PE market as a whole – they will take longer if the broad economic landscape continues to deteriorate.

Using a technology-driven private equity strategy is a versatile way for institutional investors to continue to play offense while preparing for an economic downturn. “Headlines aside, tech and software are a pretty good place to park money right now,” says Fleming. In a broader sense, the ability to play well both in attack and defense is one of the main reasons why experienced managers tend to outperform in all economic cycles – and why Antares has thrived for over 25 years. year. “In the more turbulent economic environment we currently find ourselves in, the best opportunities for investors will come from working with trusted and long-established asset managers like Antares,” says Fleming.

See more information about the Antares market.

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