McKinsey - Private Equity Investments in Tech Services

This report provides insights into private equity investments in the tech services sector. The report highlights that tech services currently account for 25 to 30 percent of the total assets under management in tech, representing a ten-percentage-point increase over the past decade. The report also notes that recent market corrections have depressed valuations in the tech services space by more than 40 percent. Understanding the structural differences between software/SaaS and tech services is important for stakeholders, especially PE investors. The report suggests that PE investors should ideally avoid relying on multiple expansion to generate returns in tech services. Successful PE deals in tech services have five things in common: they scaled or differentiated their competencies, shifted their portfolios to serve tech-native customers, optimized platform costs, derived more synergies from M&A, and had entrepreneurial, customer-focused leaders who delivered consistent performance even in uncertain times. The report also highlights that the enterprise-value-to-revenue ratio almost doubles when companies cross the Rule of 40 threshold compared to their counterparts with annual earnings growth of 30 to 40 percent. The difference between these two cohorts is explained by the difference in their revenue growth profiles. Overall, the report provides valuable insights for investors looking to enter the tech services sector.