Unlocking opportunities for a successful tech business exit
While the economy in the UK seems to be recovering from the impact of high interest rates, rocketing prices and overall global social-political uncertainty, these factors do not seem to have had much impact on the volume of IT services M&A over the last 18 months. In fact, this particular segment in the tech sector has shown time and time again its resilience regarding buying or selling businesses, attracting investors and raising funds for a successful tech business exit.
Latest M&A and growth capital reports
The data from Moore Kingston Smith Corporate Finance Q1 IT Services Sector M&A Report and Growth Capital Update explains why we expect the sector to deliver strong figures for deal volume in 2024, with deal numbers remaining steady at 156 deals in each of the last two quarters. In terms of growth capital, over 260 deals were recorded in Q1 FY24 – a staggering 102 deals successfully completed in IT services, raising capital of £505 million.
IT managed services deals made up 37% of all the Q1 M&A transactions recorded in the outsourcing and distribution space, up from the 30% that we recorded in Q4 2023. A high proportion of the managed services targets specialised in cloud-based services, with legacy IT infrastructure firms increasingly looking to expand their offering into cloud-based technology.
Private equity dominance
Another important trend is the percentage of transactions involving private equity. This has increased significantly and is now running at the highest level we have seen in the past two years, with 71% of the deals in the UK being PE-backed, up from 66% in the previous quarter.
It is also interesting to note the amount of dry powder that PE firms are seeking to deploy into the IT services sector. As an example, Bowmark Capital has announced over £1 billion in dry powder intended for mid-market tech businesses with steady growth, strong culture and ambitious plans.
With consistently strong appetite from private equity firms in the IT services and tech sector in general, and the decline in popularity of initial public offerings due to the high interest rate environment, private equity is a key route to market for founders and owners wishing to either exit or take their companies to the next level.
A great example
This trend is reflected in one of our recent deals, where we advised 2i Testing on its investment from Rockpool. Based in Edinburgh, 2i provides quality engineering services that de-risk its customers’ digital transformation. The company plays a key role in the long-term development of mission-critical IT systems, deploying highly skilled software engineers and automation products to its public sector and blue-chip financial services client base.
After providing 2i with strategic growth advisory services to help the owners understand the steps required to become one of the UK’s largest independent test consultancies, and following 2i’s exceptional operational and financial performance, the business engaged Moore Kingston Smith Corporate Finance to find a strategic partner to accelerate business growth.
Rockpool Investments is a private equity firm dedicated to finding opportunities for individuals to invest in private companies. It provides funding of between £5 million and £15 million for profitable UK-based private companies and has invested over £650 million since inception.
Why private equity firms are interested in the IT services sector
Resilience and growth potential of the IT services sector
PE firms are drawn to industries offering business-critical services with strong recurring models, and IT stands out as a beacon of stability amid turbulent market conditions.
Scalable business models operating in a fragmented market
IT businesses often boast highly scalable models, allowing for rapid expansion.
Diverse product offerings
The diverse service offerings that IT services businesses provide allow private equity firms to build well-rounded portfolios of complementary businesses, mitigating risk and optimising opportunities for value creation through cross-selling and upselling to customers.
Innovation and disruption
Private equity firms recognise the immense value in investing in companies at the forefront of innovation, where they can capitalise on disruptive technologies and drive substantial returns on investment.
Attractive exit strategies
Private equity firms inherently focus on generating returns for their investors. The fast-paced nature of the IT industry also means that investment cycles can be relatively short compared with other sectors, allowing private equity firms to unlock liquidity and reinvest capital efficiently.
Discover other options beyond PE
If you are planning to exit and are interested in finding out more about how to realise the value of your IT services or tech business, come to our upcoming panel and networking event ‘How to complete a successful tech business exit in 2024’ on Thursday 27 June.
You will hear first-hand the experience of Dominic Ward, CEO of Verne Global, which has recently been acquired by private equity company Ardian France for approximately £450 million.
To provide you with a 360-degree view on M&A, as not all deals are PE-backed, you will also hear from Mark Simons, Managing Director of Prime Networks, the London-based IT managed services involved in several acquisitions in the last few years. Also speaking is Ruth Collette, CMO of Adaptavist Group, leading global digital transformation experts. Earlier this month, the group was honoured with the King’s Award for Enterprise in the international trade category for 2024.
The Adaptavist Group offers a comprehensive but always-evolving range of services across five key practices: agile, DevOps, work management, IT service management and cloud. Ruth has been part of many of the acquisitions at The Adaptavist Group. Most recently, the acquisition of Ukrainian tech firm Rozdoum.
A great discussion and networking opportunity in the heart of London that you shouldn’t miss.
Register for free here.
UKTN in partnership with Moore Kingston Smith Corporate Finance.
