Private Equity Activity in Tech Sector Picks Up Amid VC Pressure

Times are reportedly tough for the world of venture capital (VC) and tech startups.

As the Wall Street Journal (WSJ) reported Wednesday (Nov. 13), investors are seeking returns from VC companies and startups despite a weakened initial public offering (IPO) market. The WSJ points to a report by law firm Ropes & Gray showing that IPOs this year climbed compared to last year, though is still sub-normal.

In this environment, the report said, VCs and older startups are trying to create liquidity by selling to private equity, though the rewards are often muted compared to what they’d get from an IPO.

At the same time, private equity (PE) firms are growing more active in the tech sector, the WSJ added. Tech companies accounted for 28.3% of total PE deal value in the third quarter, compared to 18.7% in the second, according to Pitchbook private equity analyst Garrett Hinds.

“Some of the VC-backed companies that have been private for longer and have sufficient scale have been in the radar of private equity,” Hinds said.

He added that private equity buyers could eventually widen their scope beyond the high value purchases that were obvious during the third quarter.

This year has seen a few high-profile PE acquisitions, such as KKR and Dragoneer Investment’s $4.8 billion deal for educational tech company Instructure Holdings and Bain Capital’s $4.5 billion purchase of financial tech company Envestnet.

Last month, Nasdaq CEO Adena Friedman said she expects the IPO market to recover this year, telling an audience at an Axios event that while the public markets have seen a banner year, not every business is benefiting, including those with lower valuations.

“It’s a little bit of a tale of two cities,” Friedman said. “Large cap, which has done very well, and you can kind of see in the S&P 500, you have a 10% kind of valuation increase in a large cap. But if you look at the small cap index, they’re actually down 10%.”

And many later stage companies, she noted, are not fully prepared for an IPO, hoping to go public after a strong year, which has been harder amid higher interest rates.

“They want to have 12 months of really strong performance before they start to think about coming out,” Friedman said.

“The cost of capital environment has made it so that companies, those that are relying on capital to continue to grow their businesses, are definitely trading at a discount.”