Technology investment sets new records as cloud software growth continues

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This article was originally published by RSM US in its Spring 2022 Industry Outlook for Technology, Media and Telecommunications.

In a year filled with pandemic challenges, including labor constraints and global supply chain issues, the tech ecosystem hit new highs across all investment categories, including the venture capital, private equity and initial public offerings, with IPOs and special purpose acquisition company transactions. new heights.

Capital risk : In 2021, a year filled with uncertainty, U.S. venture capital firms continued their strong momentum after a record 2020 and again closed a historic number of deals, investing nearly double the amount of capital compared to l ‘last year. A first look at deal volume and value in 2021 shows that more than 15,000 deals have been closed and nearly $330 billion of capital has been deployed in venture-backed companies.

Not surprisingly, technology, media and telecommunications (TMT) companies attracted the majority of these deals and capital. Statistics compiled by PitchBook show that TMT companies ordered more than 86% of deal value and 82% of total closed deals, or $285 billion of global invested capital and over 12,000 total deals in the United States. United only.

Additionally, the venture capital ecosystem had a banner year for fundraising, which included an unprecedented number of megafunds raising over $1 billion. Fresh off the historic fundraising year of 2020, 2021 saw an almost 50% increase in total venture capital fundraising activity, ending the year just under $130 billion. $87 billion in 2020. Total fundraising was supported by 23 funds raising more than $1 billion, from the previous year, in which 14 funds reached that amount. The strong fundraising environment will continue to support this vital technology ecosystem for many years to come.

Capital investment : After a slow 2020, private equity returned to its trading roots in 2021, with the sector executing more than $1.2 trillion in value across more than 8,600 deals in the United States alone, according to PitchBook. Many factors have contributed to the tidal wave of investment activity, including the availability of private capital, low interest rates, backlogs of deals suspended due to the pandemic, and a growing number of property owners. looking to sell businesses in anticipation of higher tax rates or just to cash in. The TMT ecosystem was the target of a significant portion of this capital, with companies in the sector enjoying nearly $250 billion in transaction value from more than 1,300 deals completed.

Information technology and software, in particular, continue to be popular acquisition targets, and 2021 was a year that saw many big deals. For example, 32 technology deals have been closed for over $1 billion, for a combined total of over $100 billion. As businesses around the world turn to technology to meet the unique needs presented by the pandemic – including automation, hybrid working, workforce and workplace management and the constraints of supply chain – private equity firms have been investing aggressively, hoping these trends will create new opportunities for growth.

Public Markets (IPO and SPAC): The IPO window for technology companies remained wide open in 2021, as 148 TMT companies listed their shares on US exchanges with a total market capitalization at the time of listing of more than $550 billion. Although the year ended with some momentum from public markets, particularly for tech companies with high valuations as investors brace for interest rate hikes from the Federal Reserve , we believe that a growing number of mature private technology companies will continue to look to public markets. registrations as an exit strategy in the coming years.

SPACs remain active in pursuing targets to achieve mergers, with 610 SPACs actively trading in the United States in search of a target, according to data compiled by Bloomberg. Silicon Valley Bank’s 2021 Q4 State of the Markets Report estimated that $26 billion of SPAC capital was likely to target TMT companies, or approximately 30% of available SPAC active capital. Additionally, data compiled by PitchBook shows that 154 US-based TMT companies have completed reverse mergers since the start of 2020 and are currently listed on the NYSE or Nasdaq, with a combined market capitalization of $309 billion at the time. of the completed merger. .

Over the past two years, public investors have found favor with fast-growing tech companies, and we expect this trend to continue, although valuations will come under pressure as investors react to rising prices. Treasury yields. TMT companies with predictable and recurring revenue streams, high sales growth percentages and strong balance sheets will continue to be attractive investments in a higher interest rate environment.

Business demand for cloud-based software will continue

After rapidly adopting a combination of collaboration, communication and connectivity tools in response to the entire workforce working from home, businesses around the world will continue to adopt and upgrade their equipment. IT and their digital infrastructure at a rapid pace in the years to come. Spending on enterprise software in e-commerce, human capital, finance, customer relationship, cloud infrastructure and other solutions is expected to be a bright spot this year and beyond.

Companies will increasingly focus on moving financial and enterprise resource planning tools to the cloud in response to the pandemic’s emphasis on the need and importance of cloud-based solutions and capabilities they can provide. We expect strong growth in the adoption of cloud-based ERP tools, which currently lag behind other cloud-based tools, in this year and beyond as businesses adjust their IT budgets to connect and empower finance and leadership teams. Global ERP spending is expected to grow from $30 billion in 2021 to $49 billion by the end of 2025, according to International Data Corp., representing a compound annual growth rate, or CAGR, of more than 13 %.

In addition, high adoption of cloud-based human resources and payroll-related tools is expected, as the workforce and hybrid workforce challenges faced by many organizations necessitate more powerful, connected and collaborative tools and today’s advanced cloud-based platforms provide powerful solutions. Globally, growth in spending on cloud-based HR and payroll solutions is expected to grow from $21 billion in 2021 to $32 billion, a CAGR of 11%.

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