Software activity has made up the bulk of U.S. private equity and venture capital dealflow in 2020, as coronavirus lockdowns left consumers and companies alike looking for digital solutions.

Tailwinds in the technology sector have created a sea change in limited partner sentiment. In conversations at the beginning of the year with endowments, individuals were nervous about the heavy weighting of their technology investments, both public and private, a placement agent said in an interview. "Well nobody is saying that anymore because tech has just outperformed," they added.

"Even we kind of underestimated how resilient the software sector would be through the pandemic," Lonne Jaffe, managing director of software-focused venture capital and private equity firm Insight Partners, said in an interview.

With the lockdown limiting interactions and driving people online, technology-focused businesses have been in high demand. Subsectors such as digital and online collaboration businesses, which facilitate ways that people can work together virtually or improve website experiences, are even more attractive, investors said, as are telehealth businesses and mission critical software providers, such as those offering online order platforms for restaurants. Co-browsing, which enables customer services to guide customers through complicated processes online, is also an area of interest.

Software assets have been resilient through previous shocks, Orlando Bravo, co-founder of software- and technology-focused private equity firm Thoma Bravo LLC, said during the Leveraged Finance Fights Melanoma 2020 benefit Sept. 10. "When you're so embedded in your customers, software has become their business. You cannot transact, analyze information, communicate, market to your customers, without these core pieces of technology," Bravo said.

As during previous shocks, recurring revenue for software businesses stood tall and did well during the coronavirus pandemic, Bravo added. "Corporate customers paid their subscription software revenue, but they didn't pay rent. It was more stable than real estate."

Technology is everywhere, Insight Partners' Jaffe said. While historically large segments of the economy, like banking or telecoms, have a few large companies, "the software market is unprecedented in that it continues to create significantly more $1 billion winners than pretty much any other industry past or present," he said. Before advancements in software, a piece of machinery could be accessed by maybe 20 or 30 people, Jaffe added. "[Software is] incredibly scalable. It can be distributed over the internet at extremely low cost, and for example, if you build a powerful piece of software like Gmail, it can be accessed by over 1 billion people."

Given the strong performance of their peers, most technology and software companies that approached Owl Rock Technology Finance Corp. — which focuses on making debt and equity investments — have been looking to raise capital for offensive reasons. Co-portfolio manager Pravin Vazirani said companies have been looking to "really double down and play off it" during the outbreak, adding that they see an "opportunity to really be a little bit more aggressive."

On whether the popularity of technology and software assets would cool off once normal life resumes, Jaffe said "it won't be 20 steps forward, 20 steps back," but it "also it won't be exactly the way it is now." He expects the demand spike in today's popular subsectors will ease slightly, but the digitalization of some industries has been sped up.

"Three or four years of digital transformation is happening in certain industries over the span of a few months, and it's not going to go back," Jaffe said. Once consumers have applied for a mortgage or done a notary online, for example, their mental model will shift and their behaviors will adjust, Jaffe added. "That's not to say that you will never want to go into a bank to do notary anymore, but the idea that you can now do it online will just be sort of front and center."

Owl Rock's Vazirani uses the term "the sugar rush" — are investors buying into particular subsectors given current popularity due to the consequences of coronavirus and getting "this sugar rush for COVID"? Or are these long-term trends? It's a bit of both, he said. "There's no doubt that the secular trend is towards digital adoption," Vazirani said, adding, "I view it as an acceleration of a train that was already moving in that direction."