The epic global COVID shutdown in ‘20 and the historic government, consumer, and business spending spree of ‘21 and ‘22 leave us with massive economic uncertainty as we head into ‘23. Recession, high inflation / interest rates, housing and office markets in steep decline, and an end to government stimulus are just a few of the challenges facing us in ‘23. China, which has a self-inflicted economic slowdown, still thinks it can control COVID (Fauci flashbacks) – maybe not given its recent easing of widely protested zero-COVID policies. This might be an omen of what’s to come between the Chinese people and Xi’s Communist party. Putin’s war and Europe’s energy crisis are ugly realities, but hopefully they can be brought to an end sooner rather than later. Layoffs across the tech sector are mounting and will continue into ‘23, but it’s not clear how much they will hurt consumer and business demand. I highlight these concerns and uncertainties because companies across the world have started to defer, cut back, or cancel technology purchases. The digital world and corporate software got a massive lift from COVID and all the stimulus, but now those same forces are working against us. Corporate buyers have a much higher bar for not only buying new technology, but also adding to or maintaining recently deployed technology. Accordingly, most technology companies will cut their ‘23 forecasts over the next three months, or else they risk disappointing investors come quarter end. This same dynamic will play out for all of ‘23.

Click to download AGC’s report: AGC’s 2022 Year-End Report

Watching valuations over the last 18 months in the public and private markets reminded me of the old fable about the tortoise and the hare in the big race. Public market values took off like the hare, rising to 18x revenues in Feb ’21 with little concern for quality gross margins, sales efficiency, future profitability, competitive threats, etc. Meanwhile, private market valuations were moving up but much more slowly with a keen focus on performance metrics and clear limits on what they would pay to own an asset. So as we enter the fall of ’22, the private markets power on doing tech M&A mostly at valuations between 6x to 11x current ARR. Reinforcing this valuation range, AGC has closed 32 deals so far in 2022, including 22 SaaS deals with a median revenue multiple of 11x. Public SaaS companies are currently trading at 6.4x trailing revenue, which is exactly the same as the six-year pre-COVID median and well below the ’17-’19 median of 8.5x. If this group of companies’ projections hold up, then the SaaS sector is clearly oversold.

The public market is driven more by momentum players and macro sound bites than fundamental research. Institutional investors – despite being the most influential public market drivers – are for the most part uninvolved in managing the operations, strategy, or acquisitions of the public companies they invest in. Alternatively, private equity investors have controlling ownership of the companies and therefore hire/fire the executive team, approve budgets, compensation, acquisitions, and are involved on a monthly basis in the operations of the business. The PEs are not all brilliant business builders, but they do bring a ton of experience and are highly incentivized to make the company thrive for a big exit down the road. Because platform deal and business building skills are critical for PE success, you have seen far more discipline on both fronts by the PE world during the recent boom times, particularly when compared to the public markets, IPOs, and SPACs.

The tech PE world and their LP backers need to remain vigilant so that, as fund sizes, teams, check sizes, and number of portfolio companies continue to grow, they do not stray from their intense investment disciplines and fall into some of the same traps that public companies have succumbed to. As tech AUMs are now so large and macro headwinds have become so strong, PE funds will need every bit of that discipline in order to maintain superior IRRs.
The new $500B+ spending bill (called “The Inflation Reduction Act”) and recent $500B student loan handout will obviously add to our current inflationary inferno of spending and price increases. So while the common man is paying twice as much for his new home, rent, and energy bill, his income has only marginally increased. Maybe massive continued stimulus is more the problem than the solution. Expect high inflation to continue, real GDP growth to remain flat to negative, and corporate revenues and earnings to be scaled back for ’22 and ’23. Some companies are beating their forecasts, but most of those projections have been revised downwards and are at lower growth rates than the trailing twelve months. A big question for all of us across all business sectors is how much of our great success over the last two years was COVID/government stimulus-based and, if so, what is the new normal? Putting off taking the medicine and doctor visits will prolong illness or even cause death in severe cases. As our country’s leaders endorse further reckless spending over fiscal discipline, they dig us deeper into a hole and closer to the precarious third rail of high inflation, negative growth, and mounting deficits common for a banana republic.

The public market correction and macro headwinds have our clients reforecasting the next 12 months with a more conservative eye so they can over-deliver during the M&A process. AGC is deep in the trenches with 40 active engagements and 10 under LOI. Interestingly, we have not seen the large public strategics buying many VC, PE or founder-owned SaaS businesses as of late. In fact, the tech bigs (Apple, Microsoft, Google, Amazon, and Meta) have combined for only 12 acquisitions YTD in ’22. That compares to 30 during the first eight months of ’19 pre-COVID. With the downturn in valuations, we anticipate this could be an area of growth, but for now, some strategic acquirers remain on pause as they get their own house in order. The banks and debt funds are on the run, abandoning previously committed deals and drastically lowering the debt offered on new deals. The tightening of the debt markets is driving down IRRs and valuations. LPs are likewise pulling back, putting the hurt on funds attempting to raise capital in 2022 or planning to go to market in 2023.

On the bright side (which I always have a need to find) we have a tech ecosystem full of great companies with super smart entrepreneurs and more private capital than ever before. Over the summer, we signed up 25 new engagements because these CEOs feel great about their prospects even with the inflation and recession headwinds. Yes, the larger deals are on hold hoping for clear skies which may be a ways off, but overall, transaction volumes for YTD ’22 are tracking at a historic high of 5,200 vs. 4,300 deals for 2021 and 3,800 between 2016-2019. In our discussions this summer with the large strategics, PE-backed strategics, and active PEs, we hear a very common theme of, “we are more excited about acquisition prospects than we have been in some time to get quality deals done at reasonable prices, and we have the capital and mandate to do so.” That said, August transaction volumes came in light, so we will see if that is just deal makers taking more beach time or something more ominous. So while uncertainty swirls around the world, the tech M&A engine in middle markets is powering on doing deals and building businesses.

The private PE investors for the most part did not chase the frothy 18x public valuations as the less disciplined cohort of minority growth venture investors did. So while there are many overvalued and cash-strapped VC-backed companies out there, there are far fewer among the controlling PE portfolios. The overspending unicorns with low cash reserves are struggling right now to find funding that they can swallow. The PE-backed SaaS portfolio companies are generally profitable, growing nicely, and some are probably a revenue turn or two – or even three – overvalued. As you can see from the top tech PE acquirers, add-on acquisitions are the top priority for these PE funds. The top 325 tech PE funds have now amassed 3,200 tech portcos via platform acquisitions and non-control stakes. In talking with the largest and most active PE funds, it is clear that a very large percentage of their returns have come from add-on acquisitions. The value creation from these add-on acquisitions will make the PE portcos arguably the best buyers in these down markets.

Since the tech IPO boom started in early 2020, there have been 235 tech IPOs: 74 SaaS-based and 161 non-SaaS. Overall stock performance on these 235 is down 54%, with the non-SaaS companies down 58% and SaaS down 35% – largely in line with the broader SaaS 160 index, which is down 48%. Even worse is the fact that the non-SaaS tech IPOs are trading at 2.2x revenue while the SaaS IPOs are trading at 4.9x ’22 revenue. Wall Street obviously did not show much discipline as the sponsor of this crop of IPOs and as such it may be another year or two before institutional investors come back to the IPO trough in volume.

During that same period, there were ~200 completed tech SPAC acquisitions representing $540B in deal value and ~600 tech SPAC IPOs raising $170B in proceeds. Those de-SPACs are now trading at roughly $230B in aggregate value and 3.6x ’22 revenues. The 60 announced and pending tech SPAC acquisitions have less than a 50% chance of closing, and most of the 300 pre-acquisition IPOs still standing will time out and return the IPO funds. For most any SPAC deal that closes these days, it’s more badge of horror than honor. The stock typically drops from $10 to $5; they barely have enough cash to pay their banker fees; and, they have virtually no float and little (if any) Wall Street support. So they should definitely be asking themselves, “should I close my SPAC?”

Click to download AGC’s report: AGC’s Fall Tech Capital Markets Update

Healthcare payers are feeling the pressure to achieve greater cost containment and reduce fraud, waste and abuse that costs the U.S. at least $120 billion annually. Shifting from traditional cost-containment methods of the past to technologies like artificial intelligence (AI) has reshaped the industry’s future. At the same time, providers are evolving and making changes to their billing processes based on new models. In order to mitigate potential payment errors, health plans are moving from a retrospective process of identification and recovery to a more cost-effective prospective approach. New laws surrounding surprise billing are also adding complexity to the payment integrity market. According to a recent survey, 74% of respondents were unsure if they can meet Advanced Explanation of Benefits (AEOB) requirements, further fueling market turmoil with patients bearing more payment responsibility. This report takes a closer look into the market as well as companies in the ecosystem, M&A and private placement activity.

Click to download AGC’s report: HCIT-Payments-Thought-Piece-January-2022-v3

The global legal and compliance tech market, estimated at ~$28B in revenue currently, is poised for explosive growth in the years ahead as legal and compliance teams fully embrace digitalization and automation tooling. Legal tech solutions increasingly revolve around real time data access to  contain costs, increase automation and improve outcomes, while Compliance tech is increasingly deployed to safeguard massive amounts of data brought about by new privacy regulations. Both capital raised and M&A deals hit all time highs that far surpass the 2020 levels. With over 300 companies identified in AGC’s Legal and Compliance Tech landscape, this industry is large and growing rapidly with many new startups disrupting the status quo and a few giant incumbents competing for pole position.

Click to download AGC’s report: AGC-Legal-Compliance-Tech-Feb-2022

COVID-19 hit hospitality harder than any other industry. Overnight nearly all hotels worldwide were shut down or reduced to skeleton staffs with few guests. Revenue per available room (“RevPAR”), the industry’s most watched KPI plummeted by 80% in the US. Faced with an existential crisis, the industry turned to tech to stave off total collapse. As vaccination rates climbed and travelers returned to hotels, demand rebounded at rates that surprised nearly all industry observers, catching hoteliers flat-footed, and leading to a scramble to staff back up to normal operations.

Historically, the industry has relied on cheap labor to keep properties humming. With labor markets tight and wage inflation on the rise, that model no longer works. As the industry quickly transitions from life support to profitability, technology is playing an important role in driving efficiency on two primary fronts: short-term, solutions that enable hotels to do more with less (headcount in particular); and long-term, platforms that help hoteliers recapture distribution from OTAs.

Against this backdrop, PEs and strategics have pre-positioned for the industry’s re-opening with a frenzy in deal making. Hospitality tech M&A hit a record $15.5B in 2021, more than double the prior record in 2019.

Click to download AGC’s report: AGC-Hospitality-Tech-May-2022

Data as a Service (“DaaS”) encompasses companies that aggregate, curate, analyze and add value to data sets and then sell that data to augment organizations’ internal data sets to improve business processes and decision making. Many data providers wrap software applications or services around their core datasets to provide an integrated solution. A plethora of new data providers are emerging to coexist with – and sometimes replace – more traditional first party data providers. Don’t be confused…this report is not about other DaaS segment acronyms such as using the cloud to deliver data storage, management or analytics services, or “Desktop as a Service” that delivers virtual apps from the cloud to any device.

The data evolution has led to unprecedented demand for data outside of traditionally data-hungry markets like finance/credit, sales and marketing and real estate. Adoption has exploded for third party data across many other industries including retail, recruiting, healthcare, geospatial, food, agriculture, and others. Publicly-traded DaaS companies have demonstrated impressive operating results – above that of many other tech sectors. Companies like ZoomInfo have demonstrated that DaaS can scale, and other more sector-oriented companies achieve significant scale by wrapping around a focused software application where their data sets can provide a competitive advantage.

Data is the foundation of any winning application platform. Software and analytics are only as good as the data that powers them!

Click to download AGC’s report: AGC-DaaS-Mar-2022

The global tech ecosystem has escalated to a feverish pitch since briefly getting crushed by COVID in the spring of 2020. Tech company formation, revenue and hiring growth, and the viral spread of technology to every aspect of our lives has propelled the sector to be the #1 industry, representing $6.9T in GDP, ahead of manufacturing, finance, healthcare, and everything else. Entrepreneurship, VCs, PEs, bankers, and public investors have stoked the flames of the raging tech industry’s growth with a flood of capital, manpower, and creativity.

While not all of the fruits of technology utilization are pleasant – e.g. 10 hours of screen time a day – there is so much of our lives that have been altered/improved in the way we work and live by the introduction of new technologies. 24% of the S&P 500 is represented by technology and the public software index has risen by 218% since April 2020, outperforming the S&P 500 by more than 2x. Annual technology M&A transaction value, which peaked around $600B pre-COVID, will cross over $1.3T this year. The tech IPO market will be up 7x in 2021 compared to its ten-year median. The SPAC market, which did not exist two years ago, will put up $480B in M&A value and over $100B in IPO proceeds in 2021. Public SaaS valuations, which have fluctuated between 5x and 10x revenues over the last 10 years are at roughly 16x.

In this post-COVID world, the sun has shined on technology, and tech PE funds have been making a ton of hay. By our last count, there are now over 300 tech PE funds with 3,700 portfolio companies and over $1.5T under management. Led by Vista, Hg, TA, Thoma, and Insight, tech PEs have done 1,200 of the 3,700 tech deals thus far in 2021. The latest tech funds to be announced are ginormous: Insight at $20B, Silver Lake at $20B, Thoma at $22B and Vista at $22B. Rumor has it that Thoma currently has five funds in the market raising a total of $34B in dry powder ready for deployment in 2022. AGC has now done 15 transactions with Thoma including PDFTron and Greenphire. With this amount of fund raising, AGC think there should be a few more deals to come!

Near zero interest rates, sky high public valuations, and strong PE returns are drawing LP allocations into these tech funds. In turn these tech funds will be doing larger deals, more go privates and a lot more PE to PE deals. The number of “club” deals has rocketed in the last two years and for several good reasons. The growth and quality of the 3,700 PE Port Cos makes for good hunting. In addition, a PE selling 51% of a Port Co to a fellow PE versus exiting 100% benefits from a big step up in basis (not to mention cash plus bragging rights), a continued position in a great company and a new partner to carry the torch going forward.

The PE funds have rapidly deployed a ton of capital for company building, acquisitions, and shareholder liquidity. In many cases, they have also advanced their portfolio companies’ capabilities across multiple fronts driving organic growth as well as acquisitions. Value creation from these activities has been enormous, and in some cases, it has been good enough to just rely on the benefits of growth and multiple expansion. As they say, it’s good to be in the right place at the right time, and technology private equity has been in the right place at the right time in a COVID world.

Tech venture growth funds have now emerged to be contenders for investing in these hyper-scaling young private tech companies. The days of venture capital checks capping out at $20M strictly for primary investment have been blown away by these new age venture growth funds like Tiger, Softbank and Founders. In the last three years, the top 150 venture growth funds have logged over 15,000 minority investments, with the top five combining for nearly 2,000. These funds are writing checks at a furious pace, sized between $5-200M with commitments made over a cup of coffee on the back of a napkin. Deals are done with limited due diligence, 30-day closings, standard preferred terms, sky high valuations, and passive investors. In many cases, the venture growth minority check is beating out the PE majority check with a higher valuation and the lure of not giving up control.

In AGC’s annual PE report, they have surveyed more than 50 of the top tech-focused PEs. With heavy participation from many of the top PEs, they gathered four years of stats on tech M&A activity, total assets under management, total number of majority-owned portfolio companies, and total number of platform deals.

Click to download AGC’s report: AGC-Tech-PE-Annual-Report-Dec-2021

The 176 recent Tech SPACs in the market are breaking open the private equity world to allow the younger and sometimes more speculative companies into the public markets. PE, later stage VC, and strategics are no longer the only option.

Simultaneously, the oceans of cash in pensions, hedge funds, institutional investors, family offices, and Robinhood accounts can now play in the early stage technology company arena – it’s a brave new world.

Do not get me wrong! This is a much higher-risk world of investing, where single investments and companies can crash and burn overnight. You are not investing in Disney-type companies.

The results so far are spectacular. The 41 announced or closed Tech SPACs are up 60%, with only 3 below their $10 issue price. Valuations are up and stock performance is slightly down on recent SPAC deals. The 27 closed deals are up 76%, with a 7.3x revenue multiple, and the 14 announced deals are up 43%, with a 13.7x revenue multiple.

There have been 16 Tech SPAC filings in the last two weeks, including Thoma’s $900M SPAC. The median raise is $225M, down from $284M on the most recently closed SPACs, and the warrants are trending from 1/2 to zero. In fact, Thoma filed their IPO with 1/5 warrants, then filed an amendment taking public warrants down to zero – telling! The median EV is down slightly from $1.7B to $1.5B, and this trend should continue because median SPAC proceeds are coming down. SoFi just announced at ~$9B EV, up 60%, and Achronix at $2B, up 12%. Interesting that SoFi was announced just 3 months after completing their IPO. The 27 closed SPACs were announced roughly 16 months from IPO, and the 14 announced SPACs were 7 months. Expect more SPACs to be finding and announcing their acquisitions at a faster pace, as the SPAC market gets more fluid and institutionalized.

With 41 Tech SPACs announced or closed and 135 in or soon to be in the market for acquisitions, we have massive experimentation for this new world of earlier stage public tech companies. We are already seeing deal size getting smaller, driven by far more acquisition targets at sub-$1.5B values. The public warrants are trending down or going away completely. Announced valuations are going up, which may have a dampening effect on aftermarket performance and hedge fund and institutional investor demand. The common and core mission for sponsors, PIPE investors, and acquired companies should be to fund quality tech companies ready for the public limelight that are priced for success.

Click to download AGC’s report: AGC-SPAC-Update-Jan-2021

The COVID 19 Pandemic has accelerated what was already an “E-Commerce Wave” to become an “E-Commerce Tsunami”. As consumers have been holed up in their homes, online commerce has exploded. According to Nielsen, pre-COVID, only 9% of global consumers were shopping online regularly. Through COVID, 27% started shopping online for the first time. By May 2020, 44% said they were shopping online regularly each week. And, a recent study of 14,000 consumers by Shopkick also supports this massive change in consumer behavior. That report states that 60% of the study’s respondents say that the Pandemic has forever changed their shopping habits.

This report on Marketplaces is Part One in a Three Part “E-Commerce Tsunami” Series:
Part 1: Marketplaces Go Mainstream
Part 2: The Strong Swell of DTC Brands Disrupting the Retail Landscape
Part 3: The Technology Undertow Powering Massive Changes to the Retail Industry

This report focuses on how Marketplaces have in fact “gone mainstream.” They represent a $2.1 Trillion market opportunity with 1200+ companies across the U.S and Europe. They represent over 50% of all online purchases and almost 60% of Amazon’s total revenues. Marketplaces thrive across a wide variety of verticals and expansive types of products—from habit forming daily transactions to high cost luxury experiences. This report also focuses on the Marketplace models of today and and key success factors.

Click to download AGC’s report: AGC-Marketplaces-Go-Mainstream-Dec-2020

The COVID-19 crisis has forced a once-in-a-generation shift at all levels of the real estate value chain as tenants and owners rethink how they use space and allocate strained budgets. The critical importance of real estate tech to solving the current crisis is demonstrated by unprecedented investment into real estate tech solutions, a historic spike in M&A activity and a massive run up in share prices for most public real estate tech companies.

Click to download AGC’s report: AGC-Real-Estate-Tech-Nov-2020