Trends Watch: Private Equity Investing in Software and Technology

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Federico Canciani, Managing Partner, GTO Partners.  

What is your outlook for private equity investing in software and technology? 

Software and technology investing has just gone through a rollercoaster over the last few years, but finally sellers and buyers are coming closer together in terms of valuations expectations.

In our experience at GTO, we found that this effect of “closing the gap” has been linked to three main causes. On one side, multiples expectations on the sell side have come down even if marginally. In the second instance, public markets have recovered with the NASDAQ materially higher since the beginning of the year. And finally, higher growth businesses have started growing into their valuations through sustained performance.

By January 2024, there should also be more visibility on the Fed’s intentions on interest rates for 2024-2025, and a soft landing, or lack thereof, of the U.S. economy.

Europe is lagging, with the mood among investors still uncertain although the influence of the U.S. green shots is starting to come across the Atlantic where deal activity is also picking up.

In the long-term, the tailwinds in software adoption continue, and the recent focus on generative artificial intelligence (AI) just proves the point that innovation in the space will continue to play both a defensive as well as offensive role across all industries and geographies.

Where do you see the greatest opportunities and why?

At GTO, we focus on control deals of companies that have international presence or international ambitions in the lower mid-market where our value creation team can be uniquely positioned compared to local investors.

Within these we look for markets that are growing somewhere between 5% and 20% where our “good to great” approach is optimal and have a certain degree of fragmentation where niche businesses can thrive and grow.

That said, we are very excited by markets such as vertical enterprise resource planning systems (ERPs), human capital management (HCM), transportation and logistics and differentiated business services as they reflect our parameters above.

What are the biggest challenges you face and why?

Deal sourcing is not a problem for us as we are still seeing more than c. 150 transactions a year, nor is differentiating our offering from the competition with a strong value creation approach and an international mindset. As for many other investors now, the challenge is fundraising. The current market conditions have forced GTO, as an emerging manager, to think outside of the box and really focus our efforts in creating a very strong fundraising platform.

While we are focused on the first few transactions as proof of concept, I am confident that continuing to select only the highest quality companies, as we have done so far, will provide an attractive offering for future investors.

What keeps you up at night?

How to continuously improve our business.

I have worked with and been involved in companies of many different sizes but ultimately what determines the outperformance of the few is a relentless focus on improving the business.

This is in turn only a function of hiring, retaining, motivating and structuring the right people on the team, and devolving a sense of ownership and responsibility of what we are doing across the team --offering a unique culture that allow us to be an attractive place where to work.

With this set up, I am confident that we will be able to over deliver to our clients and prospects for the years to come.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.