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Tech investment sets new records while cloud software growth continues

Tech investment sets new records while cloud software growth continues
Written by Publishing Team

This article was originally published by RSM US in its spring 2022 industry outlook for technology, media and telecom.

In a year filled with pandemic challenges that included labor constraints and global supply chain issues, the technology ecosystem achieved new records in all categories of investment, including venture capital, private and initial public offerings, with both IPOs and special purpose acquisition company transactions new highs.

Venture capital: In 2021, a year filled with uncertainty, US VC firms continued their deals strong momentum from a record 2020 and again completed a historic number of, investing nearly double the amount of capital compared to the prior year. An early look at 2021 deal volume and deal values ​​shows more than 15,000 deals were completed and nearly $330 billion of capital was into venture-backed companies.

It should come as no surprise that technology, media and telecom (TMT) companies attracted the majority of those deals and capital. Statistics compiled by PitchBook show TMT companies commanded more than 86% of deal values ​​and 82% of total completed deals, or $285 billion of the overall invested capital and more than 12,000 total deals in the United States alone.

Additionally, the VC ecosystem saw a record year for fundraising that included an first number of megafunds raising more than $1 billion. Fresh off 2020’s landmark year of fundraising, 2021 saw nearly a 50% increase in total VC fundraising activity, finishing off the year just shy of $130 billion, up from $87 billion in 2020. The strong fundraising total was supported by 23 funds raising more than $1 billion, coming off the previous year, in which 14 funds reached that amount. The strong fundraising environment will continue to support this vital tech ecosystem for many years to come.

private equity: After a slow 2020, private equity returned to its deal-making roots in a big way in 2021, with the industry executing more than $1.2 trillion in dollars value across more than 8,600 deals in the United States alone, according to PitchBook. Many factors contributed to the tidal wave of investment activity, including availability of private capital, low interest rates, backlogs of suspended deals due to the pandemic, and a growing number of business owners looking to sell businesses in anticipation of higher tax rates or simply to cash out. The TMT ecosystem was a target for a sizable portion of this capital, with companies in the industry benefiting from nearly $250 billion in deal value across more than 1,300 completed deals.

Information technology and software, in particular, continue to be popular acquisition targets, and 2021 was a year that saw big deals aplenty. For example, 32 tech deals were completed in excess of $1 billion, for a combined total of more than $100 billion. As businesses globally turn to technology to address the unique needs presented by the pandemic—including automation, hybrid work, workforce and workplace management, and supply chain constraints—private firms have been aggressively investing, in expectation that these trends will drive further opportunities for growth.

Public markets (IPOs and SPACs): The IPO window for technology companies remained wide open in 2021, as 148 TMT companies listed their shares on US exchanges with a total market capitalization at the time of listing of more than $550 billion. Although the year ended with a bit of momentum taken from the public markets, particularly for tech companies with elevated valuations as investors brace for interest rate hikes from the Federal Reserve, we believe a growing number of maturing private technology companies will continue to look to public listings as an exit strategy in the coming years.

SPACs remain active in pursuit of targets to complete mergers, with 610 actively trading SPACs in the United States still seeking a target, according to data compiled by Bloomberg. Silicon Valley Bank’s 2021 fourth-quarter report on the state of the markets estimated that $26 billion in SPAC capital was likely to target TMT companies, approximately 30% of the active SPAC capital available. In addition, data compiled by PitchBook shows that 154 US-based TMT companies have completed reverse mergers since the start of 2020 and are currently listed on either the NYSE or Nasdaq, with a combined market cap of $309 billion at the time of the completed merger .

Over the past two years, public investors have found favor with fast-growing technology companies, and we expect that trend to continue, although valuations will be pressured as investors react to rising Treasury yields. TMT companies with predictable, recurring revenue streams, high sales-growth percentages and strong balance sheets will continue to be attractive investments in a higher interest rate environment.

Enterprise demand for cloud-based software will continue

After quickly adopting a mix of collaboration, communication and connectivity tools in response to entire workforce working from home, enterprises globally will continue to adopt and upgrade their information technology equipment and digital infrastructure at a rapid pace for years to come. Enterprise software spending on e-commerce, human capital, finance, customer relationship, cloud infrastructure and other solutions is anticipated to be a bright spot this year and beyond.

A growing focus for enterprises will be moving finance and enterprise resource planning tools to the cloud in response to the pandemic’s emphasis on the need for and importance of cloud-based solutions and the capabilities they can provide. We expect strong growth in the adoption of cloud-based ERP tools—which currently lag behind other tools located in the cloud—over this year and the next few years as enterprises adjust IT budgets to connect and empower the finance and executive teams. Global spending on ERP is expected to grow from $30 billion in 2021 to $49 billion by the end of 2025, according to International Data Corp., representing a compound annual growth rate, or CAGR, of more than 13%.

Additionally, strong adoption of cloud-based human resources and payroll-related tools is expected as the hybrid workforce and labor challenges faced by many organizations requiring more capable, connected, and collaborative tools and today’s advanced cloud-based platforms provide powerful solutions. Globally, the growth of spending on cloud-based HR and payroll-related solutions is estimated to increase from $21 billion in 2021 to $32 billion—a CAGR of 11%.

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Publishing Team