Leading lights
Real Deals speaks to James Searby of Directorbank about how finding the right talent can boost the growth of technology businesses
James Searby: The technology sector has been buoyant for many years. But recently the market has been tough. Dealflow for Q2 2023 was 40% down year on year. This has been driven mainly by high interest rates but also by cutbacks by the technology sector in the US.
Prices have dropped and sellers are holding on, hoping that they rebound. But there is still a huge amount of money in the sector, and private equity has a lot of dry powder ready to invest here.
Searby: Many businesses that midmarket private equity has invested in are managed services businesses. Because they have been platforms for buy-and-build investment, these tend to be highly leveraged. When interest rates are low, this is fine. But as interest rates increase as they have done in recent years, the cost of the debt is far higher, which becomes difficult. But businesses that are growing organically are still performing well – for example, those focused on SaaS or digital transformation. They are still in great demand and their prices are holding up.
Businesses that are growing organically are still performing well – for example, those focused on SaaS or digital transformation
Searby: Digital transformation businesses are in high demand. AI is a nascent industry that is all over the news and that will no doubt receive massive investment during the next two to three years. Data businesses are also very popular, particularly tech-enabled data businesses.
There is also a lot of interest in governance, regulatory, and compliance (GRC)-related technology businesses. Governments often require proof of compliance with legislation. Providing this can be time-consuming but third-party software can speed up the process considerably.
Finally, niche SaaS and data analytics businesses that are aligned to sectors are also trading well.
Searby: Recruitment is strong. Typically, recruitment is driven by new deals, which have dropped. But what is fuelling C-suite recruiting is private equity firms looking forensically at their portfolios to see which businesses are performing and which are not.
This includes looking closely at individual performance. Where they see underperformance, they are making changes – and this is driving recruitment.
Searby: Chief executives are particularly in demand. We have seen a marked increase in chief executive searches for businesses that might not necessarily be in a turnaround situation but have stagnated.
Our clients in this situation are looking for experienced chief executives who have previously been through a full investment cycle. They must know how to work with private equity, have transformed a business, and be able to make a great exit at the end.
The problem is that there are only a small number of such chief executives in the market. They are in high demand, which has driven up both their salary and the equity they require. But private equity firms are willing to pay to get this experience into their businesses.
Operational executives are also needed, particularly for managed services businesses that have made many acquisitions. Here, there is often a need to integrate businesses and take costs out so that Ebitda is as high as possible. It is not about financial turnaround, but making businesses more efficient operationally.
Chief commercial officers and chief revenue officers with proven experience of growth are in high demand as well for similar reasons.
We have seen fewer chairs being hired. This is due to lower dealflow, because chairs are typically hired at the point a deal is made.
The great news for technology businesses is that private equity still sees technology as a cornerstone sector
Searby: The great news for technology businesses is that private equity still sees technology as a cornerstone sector. When markets are tough, firms often look to technology to drive value. They are looking at several growth areas and have dry powder to invest.
So, the outlook is very positive, even though interest rates will probably remain stubbornly high for the next 12 months. The market is tougher than it has been for some time but the first area to rebound is always technology.
I do not doubt that the future for the sector is rosy.
About DirectorbankDirectorbank has a 25-year track record in recruiting executive, non-executive and other critical directors across the UK and Germany. Three-quarters of its placements are into private equity-backed businesses, and its technology and communications practice accounts for a significant portion of its work.
