The Smart Money is Investing in Tech

A businessman checking his investments on his phone.

Photo credit: Shutterstock

Where is the smart money going when it comes to tech companies? Some leading experts will be exploring that subject at Fortune’s upcoming Brainstorm TECH conference.

Anton Levy of General Atlantic, Kirsten Green of Forerunner Ventures, and David Trujillo of TPG will share the stage in a panel discussion on what industries, ideas, or trends they’re betting on; what they’re seeing in the tech space; and the changes they’re watching for.

It’s no surprise that technology is on people’s minds, with the June ransomware attacks and Microsoft’s announcement of its new SMB-oriented software-as-a-service bundle. A recent article in Institutional Investor says that tech deals are booming in the PE sector.

Not only that, but 2017 has been a boom year for tech IPOs, with Snap going public in March, and Carvana, Cloudera, Elevate Credit, Mulesoft, Netshoes, Okta, and Yext also making their public trading debut. The aggregate value of these IPOs is a whopping $37.5 billion, with Snap making up the lion’s share at a valuation of approximately $20 billion.

Today’s tech IPOs are already light years ahead of those in 2016. By May of 2016, only two companies had gone public. Between January and May of 2017, more than four times that number went public, and more public offerings may be on the horizon. (Tech companies that have been floated as possible IPOs, despite rigorous denial from some of them, include Airbnb, Dropbox, Pinterest, Spotify, and Uber.)

Because of the growing success and valuation of tech companies, private equity money is now flowing into the sector, accounting for almost 40.1 percent of U.S. buyouts last year. This is the highest proportion on record. Firms with a broad range of investment interest, such as General Atlantic, KKR, and Carlyle, are jumping into the game and are being joined by tech-focused PE firms like Golden Gate Capital and Siris Capital.

“An increasing number of tech-related companies have moved beyond the traditional territory of venture capital funds, and the sector as a whole has increasingly become a target for the wider private equity industry,” Christopher Elvin, Head of Private Equity at Prequin, told Institutional Investor.

China has also become a PE magnet. However, concerns about the possible imposition of U.S. trade tariffs, plus concerns about its credit, real estate, and technology sectors seem to be cooling interest in the nation. However, when risk and potential are calmly weighed, China may be the most promising private equity market in the world.

This echoes sentiments that General Atlantic CEO Bill Ford shared in a recent interview with Bloomberg. “We’ve been bullish on China despite lots of mixed sentiment—the country is succeeding in pivoting its economy from export and manufacturing to services and consumption,” he said. “We’re seeing companies there generating 15 to 20 percent-plus nominal GDP growth.”

With so many potential IPOs on the horizon, and some really promising companies to be found in emerging markets, it’s no wonder that the smart money is betting on tech to be the next private equity profit-maker.

I will be curious to see what Levy, Green, and Trujillo share at Brainstorm TECH about their vision for private equity in the tech sector and if it matches up with what other observers have been saying.

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Then and Now: IPOs, Private Equity, and the Next Generation of the Tech Boom

Over the shoulder shot of person working on laptop

IPOs and the kinds of technology behind them have changed since the golden days of 1990s Silicon Valley.
Image: Unsplash.com

The Dot Com bubble of the 90s changed the face of tech and finance in ways that are still affecting these realms today. As the hot new kind of business, tech companies proliferated in the 90s, with the IPO as a rite of passage into the “adulthood” of a “real” business. Some companies, like Apple, Yahoo, and eBay, live on; others crashed and burned when the bubble burst.

Today, tech companies shift to IPOs in different ways and for different reasons than they did in the 90s. Silicon Valley is still booming, but startups are far more likely to turn to individual investors as opposed to IPOs when trying to fund growth. The number and the value of technology IPOs are both way down from the 90s, more resembling what the market saw in the early 80s, albeit with higher amounts of money raised.

Funding in the heyday of the 90s tech bubble came from sources like Thom Weisel’s Montgomery Securities, a private equity firm built on the idea of supporting smaller, more individualized businesses. Like many of those tech superstars of the 90s, however, Montgomery Securities no longer exists—though Weisel himself has moved on to other private equity endeavors in the same vein as the company that started it all.

Part of the reason there was so much energy and enthusiasm behind tech companies of the 90s is that their stock prices soared without any real plan on how to live up to the related, absurdly high expectations. Nowadays, stock prices for tech companies rise or fall based on company profits. In fact, tech company stock is now a bit cheaper than it was then.

Modern investors are also different from their 90s counterparts in that they seem statistically more interested in investing in companies that aren’t already profiting by the time they reach their IPO. According to Bloomberg, of the 206 companies that had IPOs in the US in 2014, 71% had had no profits in the year before their offering.

Unlike the 90s, biotech seems to be where it’s at in terms of rising tech companies these days. Biotech companies tend to have IPOs similar to what you’d see in the 90s: small companies with no revenue but lots of promise, going public to raise the money they need to bring a product to market. That’s pretty specific to today’s biotech IPOs, though; in the rest of the IPO market, Bloomberg says, companies are waiting longer to go public, which is why there are fewer IPOs over all.

We may not be experiencing the sort of tech boom that became an emblem of the 90s, but there are still plenty of opportunities for small companies to make their mark on the world. Whether it’s through individual investors or IPOs, cutting edge tech will always have a place in the market. It’s just that the details of that place are likely to change over time.

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