The Tech Train Keeps Rolling as Private Equity Investment in Technology Continues to Soar
Insight Highlights
- Potential allocators to alternatives may find the terms “private equity” and “venture capital” to be synonymous or use them interchangeably. However, while both focus on investing in private companies, the investment strategies focus on different stages of a company’s lifecycle.
- Cloudera’s agreement on June 1 of this year to sell to a group of buyout firms in a transaction valued at $5.3 billion continues a 2021 trend: most of the big-dollar deals in tech are going to private equity.
- Private equity investment in technology is continuing, particularly in VC-backed tech startups to gain early access to the best private companies and higher returns. The primary explanation for this is that technology has become so prevalent in both business and daily life.
Find out which institutional private equity funds on our platform can give your clients exposure to tech companies before they go public.
Learn how you can allocate to these funds for your clients’ portfolios.
For Financial Professionals Only
While private equity investment in technology has been a powerful theme for a number of years — representing anywhere from one-quarter to one-third of private equity investment activity — the pandemic has accelerated interest in the space. In the second half of 2020, private equity investment in technology companies represented roughly 40% of total deal value, according to a report released by Ernst and Young.
2021 should see a continuation of the trend, as firms invest at both ends of the size spectrum. At the larger end of the scale, they will continue to seek out opportunities in the SaaS and enterprise software spaces, often with more mature companies that value the opportunity to effect large-scale transformation away from the quarterly pressures of the public markets. At the smaller end of the scale, they likely will continue to invest in high-growth companies in emerging verticals such as Fintech, HealthTech, and mobile.
And across companies of all sizes, they will continue to seek out companies that are poised to gain from the long-term behavioral changes that have been observed as a result of the pandemic.
Increased Partnerships between Private Equity and Venture Capital
Potential allocators to alternatives may find the terms “private equity” and “venture capital” to be synonymous or use them interchangeably. However, while both focus on investing in private companies, the investment strategies focus on different stages of a company’s lifecycle.

Private Equity (“PE”)
Traditionally, private equity focuses on investing in the middle-market sector, generally defined as an established company with a proven product, established consumer base, and history of operations. These middle-market companies are usually identified as having a need for outside help to drive more streamlined operations. PE firms will step in and assume a controlling interest in the company to promote efficiency and help established companies grow their market share.
Venture Capital (“VC”)
Conversely, venture capital will typically target early-stage startups, where one or all the following can be missing or lacking: product, audience, and/or operations. Early-stage startups often need seed capital to grow to the next stage of their development. VC firms will provide that seed capital, often without control interests, and build out a portfolio of startup investments with the hopes of select breakouts with outsized returns to compensate for less successful ventures.
Partnership between PE and VC → Benefits for LP Investors
The distinctions between PE and VC have started to blur over the last 5 years or so, as VC firms have found a new exit option for their investments – PE buyout funds. According to data provider PitchBook, nearly 20% of all VC-backed businesses exited to private equity buyout funds in 2017, vs. traditional exit options (i.e., IPO, M&A, and secondary market), bridging the two strategies together for a symbiotic relationship. VC firms have found a way to exit their seeded startup ventures and to provide PE firms access to more established high-growth companies. Breaking down the partnership between PE and VC firms and the value they are seeking:
Better Deal Sourcing with Attractive Multiples: PE firms can source attractive non-market deals from partnering with VC partners, earlier in a company’s fundraising lifecycle. With each round of fundraising, valuations typically increase. By the time a company IPOs, valuations may be stretched, providing limited upside for public market investors.
Leveraging Expertise of PE Firms in Startup Landscape: Struggling startups look to PE firms for optimization of operations and streamlined product development for growing business and increasing profits. A key advantage of working with PE firms in the private markets is that change can be enacted without public market volatility and/or disclosure.
Startups Staying Private Longer: With VC firms looking to PE as a viable exit option, startups are staying private longer, allowing LP investors in private equity the ability to tap into the pipeline of innovative technologies not available in the public market at lower multiples.
The increased partnership between VC and PE strategies has led to more fundraising for Specialist Funds (including tech), as opposed to traditional PE funds, evidenced in the graph below from Bain & Company:
Buyout fund capital raised, by year closed and type of focus
Note: Classic funds defined as buyouts funds with a diversified focus across sectors and no specific differentiators on where to play
Sources: Preqin; Bain analysis
COVID-19 Impact on Private Equity Investment in Technology
Enter the COVID-19 Pandemic, which created an environment of the “haves” and “have-nots”, resulting in a polarizing experience between innovative companies flourishing under the new circumstances, while companies with aging technology struggled to adapt. According to a study released in early 2021 by Gartner Inc., global enterprise IT spending will increase 6.2 percent this year to $3.9 trillion. Enterprise software is expected to lead spending growth in 2021, with an estimated increase of 8.8% to $505 billion.
Notable PE Spending
As corporations increased their IT spending to adjust for the growing need to be digital, private equity investment in technology followed suit to meet the demand for tech innovation. According to market research company S&P Global Market Intelligence, investors committed $65.17 billion on 2,138 private-equity deals with US-based information technology firms in 2020, surpassing investments in any other industry. 2020 finished the year with the year’s largest deal by Thoma Bravo in December, acquiring information and data analytics firm RealPage Inc for $9.6 billion.
Pitchbook reports IT investments comprising 20.2% of all PE deals in the US, detailed in the graph below.
IT investments as a percentage of all PE deals in the US
As of March 2021, private equity firms spent $80 billion acquiring companies in the global technology sector this year, according to data compiled by Bloomberg. That's an all-time high for a quarter and already up 141% on this point in 2020, which went on to be a record year for such deals.
Buyout firms are flush with investor cash and are being drawn to startups helping companies to reinforce their businesses following the impact of the COVID-19 pandemic, according to Chris Sahota, Chief Executive Officer at tech-focused advisory boutique Ciesco.
"2021 will be a time of reinvention for many companies and digital technology is driving that, so the private tech market is booming," he said. "After last year's turbulence, businesses want to be agile and they have started to future-proof their operations."
Buyout firms have been increasingly active in tech in recent years, primarily snapping up companies that have experienced slowing growth and stock market underperformance. Deal-making has picked up since the early days of the coronavirus pandemic as more organizations have come to rely on digital tools to operate their business and stay connected with employees.
Of the 12 largest tech acquisitions this year in the U.S., excluding special purpose acquisition companies, seven of them have been orchestrated by private equity firms, according to data from FactSet.
The biggest this year so far was Thoma Bravo’s purchase of security software vendor Proofpoint in April in a deal valued at $12.3 billion. In February, Stone Point Capital and Insight Partners agreed to buy tech-powered real estate company CoreLogic for close to $6 billion.
Cloudera’s agreement on June 1 of this year to sell to a group of buyout firms in a transaction valued at $5.3 billion continues a 2021 trend: most of the big-dollar deals in tech are going to private equity.

Catalysts for Technology Investment
Aging IT systems: The demand on many companies to modernize their aging IT systems provides much of the perceived value in the information technology field for investors. Among chief information officers, changes were largely made to transition to cloud computing, automation, and data analytics.
Increasing Need Across Sectors: Nearly every sector, spanning retail to healthcare, is in need of digital tools to optimize inventory-management software to customer-service apps.
Result of Private Equity Presence
Private equity has been a consistently rising force in the tech merger-and-acquisition industry for the last decade, according to Scott Denne, senior research analyst at 451 Research, a research division of S&P. According to him, private equity now accounts for about one out of every three tech acquisitions, up from less than 10% a decade ago. “More capital has flooded into the room as many tech- and software-focused private equity firms have rung up huge returns,” Mr. Denne said.
In January 2020, Cambridge Associates research reported top-performing institutional investors have raised their venture capital allocations in their investment portfolio to an average of 15%.
Sources: The Wall Street Journal, February 2021. “Private-Equity Deals for Information Technology Soar as Companies Modernize Infrastructure.”; CNBC, June 2021. “Private equity money keeps pouring into tech, as Cloudera becomes latest multibillion-dollar buyout.”; Pensions & Investments, March 2021. “Private equity’s taste for tech spurs $80 billion deal spree.”
Post-Pandemic Market Trends for 2021

Private equity investment in technology is continuing, particularly in VC-backed tech startups to gain early access to the best private companies and higher returns. The primary explanation for this is that technology has become so prevalent in both business and daily life. As evidenced in 2020, companies need a strong technology backing to keep up with a society increasingly reliant on said technology.
Digitalized Due Diligence → Faster Deal Execution
The digital transformation of many businesses accelerated because of the pandemic, which resulted in simplifying laborious practices in private equity and venture capital firms, and helped fuel the following trends:
Shortening of Due Diligence: firms replace an in-person multi-day trip with Zoom meetings saving time and resources, lowering costs (which benefits LP investors)
Expansion of Investment Opportunities: digital diligence meetings enable firms to evaluate more deals outside of major hubs like New York, Silicon Valley, and Boston
Yet it is still too early to tell if these trends will continue long term as the economy transitions to post-pandemic life and businesses return to the office.
New Key Performance Indicators
As private equity investments in VC-backed startups increase, PE firms are rethinking their traditional Key Performance Indicators (KPIs):
Client Acquisition Costs/Unit Economics: measures profitability of each unit per customer, key for showing sustainable growth; often used over pre-tax profit since most startups lose money in initial years
Environmental, Social, and Governance (ESG) considerations: measuring company's carbon footprint and diversity and inclusion metrics, necessary for a growing tech company
Emerging Sectors
2021 is expected to continue funding many under-invested sectors, highlighted in the pandemic:
Life-sciences/Biotech: new developments in mental health technology, companies using technology to lower healthcare delivery costs delivering incentives to gig employees, building new workforce-development tools aimed at reskilling people whose jobs were lost or replaced by technology as a result of the pandemic
Clean Technology: coinciding with President Biden’s commitment to making the necessary changes to reduce global warming's effects through added use of machine learning and AI
Cybersecurity/Privacy/Antitrust: expecting growth in looking to address the increased attention on data privacy and regulation for technology
Technology continues to evolve with the aim to enhance people’s lives. As technology continues to innovate, private equity firms will look to partner with these startups and deliver effective products to more consumers, driving growth for the overall society and returns for investors backing those investments.
Find out which institutional private equity funds on our platform can give your clients exposure to tech companies before they go public. Learn how you can allocate to these funds for your clients’ portfolios.