A Look at 3Q Private Equity Deal Flow to the IT Sector

Pitchbook is out with their third quarter numbers of private equity deal flow to the Information Technology (IT) sector.  Here’s a review.

Private Equity Deal Flow by Capital Invested and Number of Deals

The first graphic looks at private equity deal flow by capital invested and number of deals in the IT sector. In the third quarter of 2014, estimated private equity deal flow came in at about $15 billion, a decline from the $19 billion in the first quarter. Moving in a like direction, the number of deals also declined in the third quarter compared to the second quarter, dipping from 106 to 89.

In comparing 2014 deal flow to 2013, through the first three quarters total deal flow in 2014 is at about $48 billion, a small drop from the $49 billion seen through the first three quarters of 2013.  The fourth quarter of 2013 saw a gigantic $50 billion in deal value made, making it unlikely that 2014 deal flow will beat total deal flow value in 2013.

The recent IT sector deal flow also shows the surprisingly strong upward drift in deal value. In 2008, total deal flow value summed to $16 billion.  In contrast, total deal flow in 2014 is on track to perhaps surpass $70 billion in 2014. Interestingly, the potential $70 billion in deal flow is still $45 billion lower than what the private equity industry did in 2007, the year before the onset of the global financial crisis.

A View on the 2015 Outlook

Van Wert and Sundar Raj, close observers of IT sector deal flow were somewhat subdued about the 2015 outlook – “The start of any year is usually a little soft … the debt market is still going to be the primary driver on a lot of these PE deals and their ability to trade at these high multiples …if the debt markets contract, you’ll see a pull-back on these deals and a fairly quick correlation on the multiples investors are willing to consider. On the other hand, if the public markets correct in the near-medium term, lower stock prices may translate into more take-private opportunities for PE investors.”

PE Transactions by Sector

With the broad view covered, here’s a look at PE transactions by sector. Interestingly, the software sector has dominated 2014 so far, accounting for over 60% of all private equity deal flow. In second place is IT services at around 15%, followed by Communications and Networking at about 10%, and Hardware at around 9%.

PE Deal Flow by Median Deal Size

Lastly, here’s a look at private equity deal flow by median deal size.

Overall, since collapsing in 2008 following the housing market bubble bursting, median deal size has been on a strong upward drift. Median buyout deal size has expanded from a low of about $40 million in 2009 to a 2014 high of about $160 million.  The $160 million median deal value in 2014 is $60 million higher than the previous 2007 peak of $100 million. Median growth deal size is much  more subdued.  Growth deal size has gone from a low of a little less than $10 million in 2009 to a recent high of about $23 million in 2014.

Cautiously Optimistic

Overall, third quarter private equity activity in the IT sector was relatively strong, with the outlook cautiously optimistic for 2015.  What this holds for PE employment will play out as the deal activity starts to unfold in early 2015.