According to a report by PWC, 43% of tech M&A deals were funded by private equity (PE) investors. For the deals with disclosed values, more than 52% are in the $50 million to $1 billion range.

Private equity investors may look for different factors in a target company than the traditional corporate buyer. For this reason, the dynamic of attracting offers and deal-making changes with the involvement of a private equity firm.

Focus on management

PE investors look for a company that has a clear path to deliver success. This is, among other reasons, why PE investors are highly invested in the management of the target company. According to an article by PWC, PE investors want the target company's management to seamlessly execute in the following three areas:

  • transform the company's business model to reflect how consumers and businesses want to purchase and use technology in the current world;
  • grow through effective sales motions, including new joint ventures, alliances and new customers; and
  • reduce costs and creating efficiency within the company's existing structure.

PE investors look for management teams that are agile and have the ability to successfully facilitate change, work cohesively with a focus on transparent communication.

Research and development

Part of presenting a clear path to success involves effectively communicating the company's research and development plan and organization. Research and development forms an important part of many technology and healthcare companies. PE firms invest heavily in to find acquisition targets that fit their criteria and perform substantive industry and competition research before making an offer. For PE investors, its key that the message and plan be communicated in a simplified manner.

Private equity investors also look to understand how a target company's research and development compares and competes with others in the market. Target companies are expected to identify the right amount to be spend on research and development – an amount that is sufficient to differentiate the target company from the marketplace as well as to drive additional revenue to support high valuations.

Alternative investment strategies

In addition to the traditional PE buyouts or carve-out acquisitions, PE firms are also looking to alternative ways of investing, such as mezzanine investments (a hybrid of equity and debt financing), minority growth capital and change capital. That being said, PE investors do expect a complete financial overview of the target company, along with properly documented assumptions.

Despite the various emerging technologies, private equity firms are expected to continue investing in more mature businesses with a regular cash flow stream as opposed to new ventures.

The author would like to thank Shreya Tekriwal, Articling Student, for her assistance in preparing this legal update.

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