IT services and software: what makes the sector so attractive for private equity?

The IT services and software sector offers resilience, interesting scalability opportunities, capital efficiency and measurable results, and is thus very attractive for private equity. In addition, the outlook is bright with forecasting two-digit growth rates in the relevant target markets.

Customer loyalty in the sector has always been high: especially towards B2B software service providers and suppliers, who are rarely replaced. Finally, the overall market is expanding rapidly. Global expenditure for corporate solutions has increased from 297 billion US dollars in 2013 to more than 856 billion US dollars, equalling an average annual increase of more than eleven per cent.

IT services and software: what makes the sector so attractive for private equity? Resilience
How do these growth rates come about? A greater degree of – and increasingly complex – automation, monitoring, project management and supply chain optimisations are driving growth, with the pandemic and geopolitical circumstances highlighting the importance of the latter over the past few years. As a result, inflation and other macroeconomic factors are barely affecting spending for IT and digitalisation. Plus, companies want to be competitive – another reason for not cutting these investments. In fact, the opposite is true: in times of market stress, companies are bent on optimising efficiency and processes, and this optimisation can be measured in real time. In an ideal world this would allow market players to quickly and ably recognise inconsistencies and trends, and thus to react quickly.

IT services and software: what makes the sector so attractive for private equity? Scalability
In a nutshell, the use of software is ubiquitous, and it transcends borders and sectors. The more detailed version is that this immense expansion potential, the global use cases, and broad range of potential applications together yield highly interesting scalability opportunities. A lack of physical barriers and with scalability often merely a question of server capacity means that acquiring new customers in other markets works both globally and locally.

IT services and software: what makes the sector so attractive for private equity? Capital efficiency
Due to sheer market volume and the resulting growth potential, opportunities for value appreciation in the IT services and software sector are higher than in other sectors. This offers highly efficient equity investment opportunities. Buy-and-build strategies, whereby companies are acquired due to complementary business models or consolidation, can boost the above-mentioned scalability opportunities. The benefits of this strategy are manifold, including new expertise for the company or a larger customer base.

Deutsche Beteiligungs AG recognised these opportunities years ago, taking the strategic decision to enhance its activities in growth sectors. Put into figures, the share of our portfolio companies from the IT services and software sector has quadrupled in the last few years, accounting for 20 per cent of all investments as at 31 December 2022. This strategy is already bearing fruit, enabling us to successfully conclude investments even in challenging market situations. The disposal of Cloudflight in the fourth quarter of the 2022 calendar year is a good example of DBAG’s solid progress in this segment. Today we proudly count six investments in the IT services and software sector and seven investments in broadband/telecommunications – the gateway for all things digital.