Private capital: technology investment trends to expect in 2024

Much of the technology returns story of 2023 focused on the so-called “Super Seven” – Meta, Amazon, Apple, Alphabet, Microsoft, Tesla and Nvidia. The Super Seven are now so big that they account for 17.2% of the entire MSCI All Country World Index (ACWI), which covers approximately 85% of “the global investable equity opportunity”. By contrast, the combined representatives of Japan, the UK, China, France and Canada contribute 17.3% of the AWCI. In other words, the Super Seven broadly equate to the combined contribution of four out of the seven “G7” economies plus China. Apple alone, with a market value of c. $3tn, is bigger than the entire UK stock market. 

The incredible performance of the Super Seven, which were up by c. 74% in 2023, masked a generally more anemic performance by other publicly traded tech companies. The financial power of the Super Seven, as well as subdued public market valuations of other, non-Super Seven tech businesses, has and will continue to impact the tech M&A landscape in a number of ways, on which more below.

M&A activity in the tech sector in 2023 was muted, especially relative to the flurry of activity during the COVID years. Dealmakers wrestled with geopolitical tensions, stickier than anticipated inflation, rising interest rates, increasing regulatory scrutiny and a climate of general economic uncertainty.

Global M&A across all sectors was down 23% (by deal value) and 16% (by deal volume) in 2023, relative to 2022, with tech-focused M&A broadly mirroring those figures. Some green shoots did however emerge in the larger cap sector in the second half of 2023, with deals such as Cisco’s acquisition of Splunk and Silver Lake and CPPIB’s acquisition of Qualtrics being announced in that period.

In the UK, interest in publicly quoted technology stocks remained high, particularly in the second half of 2023, resulting in an increasing number of public to private transactions in the tech sector, including ESG / cybersecurity business Blancco Technology and life science tech business, Instem.

So as we enter 2024, there are some promising signs of a rebound, driven by the increasing focus on AI, cybersecurity and environmental, social, and governance (ESG) initiatives.

The rise of AI 

One of the most significant trends shaping the tech M&A landscape in 2024 is the increasing prominence of, and therefore demand for, AI based solutions. Such demand has not only driven innovation but also fuels M&A activity.

Larger players are looking to acquire AI-based businesses to enhance their own capabilities and stay ahead of the curve. Startups specialising in AI have attracted significant investments from major private capital investment firms and tech giants alike, paving the way for potential acquisitions in the coming year.

The Super Seven, in particular, have been actively investing in generative AI firms, driving consolidation in the industry.  The stock market’s renewed love affair with the Super Seven (after something of a “down” year in 2022) may be partially explained by the perceived benefits that each of those businesses could derive from AI.

Strengthening cybersecurity

In an increasingly interconnected world, cybersecurity has emerged as a top priority for businesses across sectors. With the growing threat landscape and the need to protect sensitive data, businesses are actively seeking cybersecurity solutions and technologies. This has led to increased investment demand and thereby valuations for businesses in the cybersecurity space.

The complexity of safeguarding data (particularly in hybrid work environments) and the rapid adoption of AI, has created new challenges for organisations. As a result, private equity sponsors and their cybersecurity focused portfolio companies are actively seeking to acquire the most cutting edge technologies and thereby maintain their market share and stay ahead of evolving threats. The overall trend of increased M&A activity in this sector is expected to continue in 2024.

Embracing ESG

The growing focus on ESG factors has permeated vast swathes of the commercial world, with companies increasingly looking to adopt sustainable practices and addressing societal and environmental challenges. This shift towards ESG-consciousness has created opportunities for tech investors and their portfolio companies that provide solutions aligned with ESG principles, driving M&A activity in this space.

From socially conscious investors to businesses adjusting to changing ESG standards, any technology or services that touch upon ESG issues are of great interest and therefore value to private equity and strategic investors alike.  The rising demand for ESG-focused technologies and services, coupled with the increasing regulatory scrutiny around ESG practices, is expected to drive M&A activity in this sector in 2024. Companies that can offer innovative solutions to address ESG challenges and help businesses achieve their sustainability goals will be well-positioned for M&A opportunities.

Geopolitical challenges and regulatory scrutiny

While the tech M&A landscape in 2024 presents promising opportunities, there are clearly challenges that private equity sponsors and institutional investors will face. Geopolitical factors, such as export controls and ongoing conflicts, will likely impact (amongst other things) advanced semiconductor manufacturing and thereby deal-making capabilities in the tech sector.

Regulatory scrutiny surrounding tech deals has also increased in many major geographies in the past 24 months, leading to delays and even termination of announced transactions. Data privacy regulations have also made it more challenging to integrate companies that handle sensitive customer data. 

A promising outlook for tech M&A in 2024

As we look ahead to the rest of 2024, the tech M&A landscape shows signs of a rebound and renewed activity. While geopolitical challenges, higher interest rates and regulatory scrutiny pose potential hurdles, the overall outlook for tech M&A remains promising. As technology continues to evolve at pace, strategic partnerships, acquisitions, and investments will play a crucial role in driving innovation, expanding market reach and creating value.

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