Q&A: Taylor Wessing on tech investment

Amy King: Which sectors in the tech market are private equity houses most attracted to?
Robert Fenner: Private equity likes the sectors in the tech market that possess a consistent cash flow, that usually means services businesses or businesses with contracted revenue of one sort or another. Product businesses have a much less consistent income and are also much more difficult to plan for, so are less suited to the debt that goes with private equity investments.

On top of that, product businesses will generally want to reinvest a lot of the profits and cash back into developing new or existing products. Again, that isn't consistent with interest payments and paying back the debt that a private equity house has put in.

AK: Have you noticed any trends or marked differences on an international level regarding private equity transactions in the tech sector?
RF: On an international level, the predominant trend has been the development of web-based consumer-facing businesses, many of which have successfully completed IPOs in the last year. However, these businesses aren't the sort that would attract private equity funding, they were venture-backed and no leverage was involved. This year we had Facebook, the year before we had LinkedIn. Hewlett Packard also bought Autonomy and that was the biggest UK tech acquisition of the year. So on an international level, we have seen some big acquisitions and some US businesses going public.

Nick Hazell: I think US investors have more experience of how to value tech businesses than their UK counterparts, particularly in the context of an IPO; that's a noticeable difference. When you overlay that with the difficulties in the IPO market in the UK generally, it's not surprising that there are more tech businesses going to market in the US. By contrast in the UK, with the public markets flat on their back, private equity has been at the centre of taking public tech companies back into private ownership.

AK: How has investor confidence fared amid the economic downturn regarding investing in the tech sector?
RF: I think it has been quite good, better than some other sectors. Interest remains active. Some tech companies on the public markets in the UK have seen little movement in their share prices despite improved performance and this provides an opportunity for PE houses to do P2Ps.

NH: Private equity funding in the sector has remained resilient throughout the downturn and seized on an opportunity, particularly in so far as small and medium- sized UK tech companies are concerned. It has effectively bridged the funding gap left by the lack of liquidity in the public markets and the continued constraints on bank lending. I also think that tech businesses now, particularly on the business services side, are more established, understood to have a track record and have huge growth potential. Therefore they can attract private equity investment at a time when other funding options have diminished.

AK: After the heights of Q4 in 2011, unquote" data has recorded a slight fall in the volume of tech investments in Q2 of 2012 compared to the previous quarter, while value has more than doubled. What do you expect to see in the remainder of 2012?
RF: I think we will continue with the same traction that we have at the moment. I don't think there will be a lurch one way or the other, valuations won't go shooting up but I don't think they will collapse either. I think the tech sector is much more established and is producing steady returns for people, I don't see that changing.

NH: The interesting thing for us is that a lot of clients we act for are now considering the broader sector more actively, perhaps for the first time. It shows that it's perceived to be a safer bet than it used to be and that the opportunities in more traditional sectors are not as good or as available as they once were.

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