UK tech investments: opportunities and pitfalls

Speaking at a breakfast seminar organised by law firm Taylor Wessing in London on Tuesday, Deloitte partner Joel Greenwood was confident in private equity's ability to inject life into a hitherto lukewarm tech M&A market. "We have seen a discernible trend upwards when it comes to private equity investments over the past couple of quarters," the corporate finance adviser noted. "It is too early to call for a full-blown recovery but things are certainly moving in the right direction."

Greenwood pointed at the amounts of dry powder still available for private equity players combined with a sustained appetite for tech-related businesses as key drivers behind this trend, before adding that "pass-the-parcel" deals had contributed to fuelling the market in recent weeks. 3i notably sold specialist IT systems and services firm Civica to Omers Private Equity for £390m at the beginning of May, while Dunedin backed the £43m SBO of technology services and solutions provider Trustmarque Solutions from LDC in June.

In addition to this favourable backdrop, a number of factors point towards a potential activity uptick in the tech sector for the remainder of 2013 and beyond. And most of these trends could result in improved exit routes, which, given the importance of clear exit strategies for GPs looking at the tech space, could in turn boost confidence and incoming investment activity.

"Strategic buyers will up their game in the coming months: economic confidence is growing, US tech corporates have been hoarding large amounts of cash on their balance sheets, and the UK is still seen as a bridgehead for US companies looking to enter Europe," predicted Greenwood. "We are also seeing strong interest from China and south-east Asia in acquiring IP at the moment, and they are naturally turning to Europe in that context."

Know thy market
This sense of optimism should not encourage GPs to spend with reckless abandon though. While tempting, buy-and-build strategies, for instance, remain tricky, argued Taylor Wessing partner Robert Fenner: "Thinking of your exit strategy is key – do not go and buy everything that is merely related to your portfolio company." Greenwood added that the collapse of IT services provider 2e2 had reinforced existing doubts over ambitious bolt-on activity in the tech space: "There has been a long track record of failure in this sector when it comes to really aggressive buy-and-build strategies."

Finally, Fenner advised GPs against relying too much on an increasingly buoyant debt market – especially since being on the cutting edge in terms of R&D is often vital for tech businesses. "You have to make sure the company is generating enough cash for both the private equity structure and R&D efforts. I have seen tech businesses starve because too much cashflow was used to service the leverage element – the product wasn't kept fresh and ultimately withered."

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