Private equity firms like Thoma Bravo LP and Vista Equity Partners have emerged as technology consolidators, taking advantage of tech giants' inability to do deals amid antitrust concerns and tumbling stock markets.

PE buyers led seven of the 10 biggest information technology M&A deals in the U.S. and Canada last year, the highest share recorded in the past 22 years, according to S&P Global Market Intelligence data. The biggest PE purchase was a $17.18 billion deal by a company by Vista Equity and partners. TIBCO Software Inc.'s acquisition of digital workspace provider Citrix Systems Inc. underscored PE firms' buying power, and showed how funds are expanding technology companies they already own via bolt-on acquisitions.

While private equity buyers have long been known as financial asset flippers, firms have now begun pursuing a portfolio strategy that leverages their growing expertise and relationships to become powerhouses of sector consolidation, a position traditionally dominated by corporate strategic buyers. In particular, Thoma Bravo and Vista Equity are respectively focusing on cybersecurity and enterprise software as nascent sectors with significant opportunities for growth.

"The playbook for consolidating tech companies specifically has gotten much, much better," said Andrew Murray, managing director of private equity at Mill Creek Capital Advisors. "Layer in the pandemic, and it's become really good."

Buy to build, build to buy

The growth of PE tech deals is highlighted by Thoma Bravo spending at least $37 billion on cybersecurity companies since 2017 — more than 10 times the amount invested by Palo Alto Networks Inc., the largest industry buyer in the period, according to 451 Research data. The PE firm has done 12 deals compared with Palo Alto's 13.

Industrywide, PE firms completed $23.08 billion of cybersecurity deals last year, almost three times the total for strategic buyers, according to 451 Research's M&A Knowledgebase.

Vista Equity Partners has mirrored Thoma Bravo's strategy in key enterprise software segments. The U.S.-based PE fund has made more than 40 acquisitions in the enterprise resource management space over the past five years, according to 451's M&A Knowledgebase.

Thoma Bravo and Vista Equity Partners declined to comment for this story.

Bain & Co. invested in capabilities to help improve the effectiveness and efficiency of software-as-a-service businesses in 2022, growing on investments Bain & Co. made in 2021.

"We're using any sort of pause in the deal markets or slowdown in the deal market to invest in those capabilities and to help our clients prepare to do as well as possible through the next cycle," said David Lipman, partner at Bain & Co. He noted subsectors like cybersecurity and enterprise software are attractive to PE buyers because industries are still going through a digital transformation and because these technologies are vital to company operations.

Demand is "very resilient," even in a recession, he said. "It is rare for anything approaching mission-critical in enterprise software to get shut off."

PE buyers have been able to pursue these opportunities, partly because plummeting stock prices and heightened regulatory scrutiny are making M&A much harder for industry giants who have historically played the consolidator role most reliably. Microsoft Corp.'s $69.99 billion bid in for games-maker Activision Blizzard Inc., for instance, has yet to clear antitrust hurdles about a year after the deal announcement. And depressed stock prices have made it harder to finance deals with equity.

Nuts and bolt-ons

Still, PE buyers have not been immune to the market turmoil. Collectively, PE firms posted almost 20% fewer technology deals in the second half of 2022 compared to the same period in 2021. More, the nature of acquisitions changed.

Smaller bolt-on deals made up 71% of all PE buys in the technology space in 2022 — while the count of deals executed through portfolio companies has doubled from five years ago, according to data from 451 Research.

The shift to smaller deals is partly because "economic uncertainty" can make financing larger purchases more difficult, said Ryan Goldenberg, a partner at private equity firm LLR Partners. At the same time, there may also be greater opportunities for well-capitalized large buyers to snap up potentially squeezed startups.

"When market sentiment is down and interest rates rise, it can put pressure on smaller businesses that often have less access to capital," Goldenberg said in an interview. LLR-backed Celero Commerce has made seven bolt-on acquisitions since the PE fund's initial investment in 2018.

Meanwhile, large-scale, expensive deals that defined 2021 and early 2022 are putting pressure on private equity to boost their return profiles with smaller, more affordable transactions, Andrew Murray at Mill Creek said in an interview.

"Averaging down the cost of entry is the theme of the day," Murray said.

An exit evolving

The growing position of private equity as a consolidator could fundamentally change the technology landscape, and it could create a better, more nimble industry, said Lipman at Bain.

For a long time, the number of publicly traded technology companies has been contracting, while the number of privately held companies has been growing. "[An IPO's] no longer viewed as necessarily the goal end state of an entrepreneur," Lipman said. "I think private equity is the long-term winner here compared to public markets."

The challenge for the PE industry in the coming years will be how to exit these enlarged platforms at a profit. Larger companies are inherently more difficult to sell, and industry buyers are unlikely to escape regulatory scrutiny any time soon. The IPO market may also take a while to rebound, given rampant inflation and volatile markets.

"Selling something small is easy," Murray said. "Selling something big is not so easy, and it's more important."

451 Research is part of S&P Global Market Intelligence.