Pent-up tech deal flow will create a competitive buyers’ market: Bain report

GLOBAL technology deals have slowed since mid-2022, as rising interest rates and declining asset values have made selling prices un appetising. This has led to a mounting backlog of tech deals that is growing faster than the current dry powder in the market.

All this is pointing towards a buyers’ market when activity picks up, according to a report by consultancy Bain & Company.

Exits are down, with only about US$20 billion in the first half of 2023, compared to US$107 billion in the first half of 2021 and US$75 billion in the first half of 2022.

Tech portfolio companies are being held for longer. For the first time since 2012, over 40 per cent of tech portfolio companies are being held for more than four years. Some 15 per cent are being held for more than six years.

Investors are now focusing on profitability over growth at any costs, and companies will have to improve their margins by scaling and boosting productivity while managing costs. Weaknesses in the business model will also have to be addressed as focus shifts to sales and marketing in a slowing economy.

Bain also notes that engaging early with tech portfolio companies gave investors up to three times multiple returns on their invested capital. Engagement should come as close to day one as possible, with investors helping to set strategy and support execution to improve earnings and boost the exit price.

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For companies already doing well, strategic investments to raise their game can deliver on average a 50 per cent increase in exit price.

“Investors and portfolio managers that don’t add significant value to their software assets will struggle to sell among a growing slate of mature assets,” said Bain.

In the artificial intelligence (AI) space, investors are urged to act fast and wisely, as the sector continues to soak up funding. With shorter cycles and lower barriers to entry, any incumbent advantage is likely to dissipate if they don’t act now.

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Investors should consider if they own proprietary data that could enrich generative AI applications. Whether the pricing models can capture value or face pressure from generative AI, and if companies have the talent to execute on AI opportunities.

“Top funds are not waiting to see how generative AI changes this space. They are biasing towards action to capitalise on the potential of their incumbent software assets,” said David Crawford, global head of Bain’s technology practice.