At a glance
- Despite the pandemic environment, investment in the technology sector has continued to set records in all categories.
- Cloud-based software demand is growing, led by finance and enterprise resource planning tools, as well as customer relationship management, human resources and security platforms.
Capital market and deal activity continued strong pace through the end of 2021
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 equity and initial public offerings, with both IPOs and special purpose acquisition company transactions hitting new highs.
Venture capital: In 2021, a year filled with uncertainty, U.S. VC firms continued their strong momentum from a record 2020 and again completed a historic number of deals, 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 deployed into venture-backed companies. It should come as no surprise that 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 unprecedented 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 dollars in 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 deals suspended 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 equity 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 U.S. 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 U.S.-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 strong growth
The TMT industry continues to entrench itself in the core of every business regardless of size, industry or location, and now provides the infrastructure and backbone of businesses globally as they transform from the inside out to meet the needs of today’s digital economy. After quickly adopting a mix of collaboration, communication and connectivity tools in response to entire workforces 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 require 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%.
Another pandemic tailwind-driving opportunity for TMT companies is a growing need for businesses to better understand their customers and the life cycle of those relationships, as well as the ever-changing landscape related to cybersecurity. IDC estimates that growth will be strong for cloud-based customer relationship management and security solutions, with spending on both expected to grow at an average annual rate of 11% from the end of 2021 through 2025. Total spending on CRM is projected to increase to $83 billion from $55 billion and security spending to $29 billion from $18 billion. The dispersed nature of the workforce, a growing number of endpoints, and an expanding customer base with a longer life cycle common to the subscription-based services provided by tech companies are drivers of the increased demand for these products and services.