2021 emerged as a blowout year for PE investments in Technology Services Firms, says Zinnov

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Jun 17, 2022, 09:00 ET

- 670+ PE-led deals took place in Tech Services in 2021 alone

- Only 20% of the deals can be called truly Digital Services assets

NEW YORK, June 17, 2022 /PRNewswire/ -- 2021 was a blowout year for Private Equity investments in the Technology Services industry. This high-octane growth, fueled by the pandemic-induced Enterprise Digital Transformation needs, led to increased investor interest in the Tech Services space. However, the mad rush to invest in the high-growth Digital Services segment also brought in the challenge of every other asset posing as a Digital Services asset, to ride the high valuation wave. A deeper analysis of this digital asset masquerade conundrum reveals that only 20% of investments were made in truly digital assets. Zinnov's latest study titled, "Convergence of Tech Services through a Digital Lens," focuses on the PE Investments landscape, highlighting the key trends driving the growth of the Technology Services ecosystem and the underlying phenomenon that have the potential to shape the growth and return on investments in this space.

The report is the culmination of Zinnov's in-depth analysis of 670+ PE investment transactions including buyouts, growth capital, and add-on acquisitions in the Technology Services space for the year 2021. Each deal has been deeply analyzed across a 20+ expansive parameters to understand the high flow of investments in the Technology Services space. These parameters include PE details, deal types and deal sizes, valuations, and multiples on the buyer side. On the asset side, the data points captured include quantitative parameters such as revenue, EBITDA, growth, headcount, etc., and qualitative parameters such as delivery regions, type and quality of service offerings, and the rationale behind the investment.

Digital Asset Masquerade Conundrum

Zinnov's analysis highlights that the number of truly Digital Services firms amidst the long tail of target assets involved in the PE deals are minimal. Interestingly, only 20% of the 670+ target firms seem to be on the higher end of the Digital Spectrum. The rise in the valuations of Digital Services firms when compared to their traditional peers, has brought with it, the "Digital Asset Masquerade Conundrum." As more and more firms try to sell themselves by 'claiming' to be truly digital, it has become imperative that PE players have the right framework to assess each asset through a Digital Lens. The lack of knowledge between what is truly digital and offerings masquerading as digital, can lead PE firms into placing bets on assets that lie on the lower end of the Digital Services spectrum, thus having a long-term impact on their portfolio and returns, highlights the report.

As enterprises grow at a pace faster than ever before, Technology Services Providers are increasingly taking on digital workloads from these enterprises, making them attractive targets for investors. In order to capitalize on the growing convergence in enterprise spends across IT, BPO, and ER&D to enable intelligent outcomes, Service Providers are transforming and projecting themselves as 'end-to-end' digital players, making them more viable targets for investors. The deal environment continues to remain at an all-time high, with investors vying to get a piece of this highly fragmented market, with vast growth potential.

Key themes driving PE Investments in Tech Services

The report identifies some of the key acquisition themes that would likely continue to drive PE investments in Technology Services over the next few years. This includes factors such as hybrid engagement models, virtual collaboration, digital talent, digital-first customer experiences, and technology innovations that have been responsible for bringing digital to the core of investment decisions. On the buyer market side, a key trend that has emerged is the rise in technology-focused SPACs and Funds. Some of these funds and SPACs are being managed by tech industry veterans, with niche focus on digital segments such as Artificial Intelligence/Machine Learning, Design & Development, Analytics, etc.

With economies shrinking, inflation and interest rates peaking, regulatory changes, geopolitical unrest, the global growth is expected to slow down, bringing with it newer challenges for investors in the Technology Services market. As valuations drop from 2021's high, all technology investments are likely to be under intense scrutiny and review, making value creation strategies an integral part of the PE playbook. Additionally, the multi-year tech talent shortage is likely to worsen, with the widening talent demand and supply gap, making it a key problem for all players to solve for.

Vimal Menon, Partner, Zinnov, said, "Our long-standing expertise in the Digital Services space and the role we have played as commercial advisors for various PE-led deals, makes us firmly believe that to create real value, Private Equity players need to identify truly digital assets. With the convergence of IT, BPM, and ER&D spends and digital continuity at play across enterprise activities enabling intelligent outcomes, it becomes critical now more than ever for PE investors to place bets on truly digital assets. To earn the right to win, stakeholders will need to assess and recognize the industry landscape, ascertain the right valuation of assets based on their position on the Digital Services spectrum and aid in its growth, and incorporate best practices in the PE investments lifecycle."

About Zinnov

Founded in 2002, Zinnov is a leading global management and strategy consulting firm, with presence in New York, Santa Clara, Houston, Bangalore, Gurgaon, Paris, and Pune. Over the past 20 years, Zinnov has successfully consulted with over 250+ Fortune 500 enterprises and technology companies to develop actionable insights that help them create value – across dimensions of both revenue and optimization. With core expertise in Product Engineering, Digital Transformation, Innovation, and Outsourcing Advisory, Zinnov assists clients by:

Identifying top technology disruptors and key growth areas that drive future growth;
Advising global PE firms in asset shortlisting and target evaluation, commercial due diligence, and value creation;
Growing revenue for companies' products and services in newer markets through account intelligence, market entry, and market expansion advisory;
Structuring and implementing Digital Transformation levers enabled by technologies like AI/ML, Cloud, IOT, and RPA;

With their team of experienced consultants, subject matter experts, and research professionals, Zinnov serves clients from across multiple industry verticals including Enterprise Software, BFSI, Healthcare, Automotive, Retail, and Telecom in the US, Europe, Japan, and India.

For more information, visit http://zinnov.com.

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