Private capital targeting 5G, AI next year in M&A

Dive Brief:

Technology will be the top sector to see merger and acquisition deals in 2020, private equity and venture capital professionals said in a survey by business accounting and advisory firm BDO.
54% of private equity and 51% of venture capital executives point to the preference for tech mergers in U.S. Private Capital Outlook.
“The private equity and venture capital industries are looking for quality deals that promise growth as well as healthy margins,” Scott Hendon, BDO's national leader of private equity, told CFO Dive in an email.

Dive Insight:

Within tech, 5G technology and artificial intelligence are of the greatest private equity and venture capital interest.

Private equity also places a high priority on the Internet of Things, while venture capital places an equivalent priority on robotics. Both sides are also looking at extended reality.

"Competition over deals continues to be intense," Hendon said. "While tech can be expensive, some areas, like [software as a service] and enterprise software, provide attractive and steady revenue streams.”

Other sectors expected to see M&A activity are energy and natural resources and finance. Media and information, real estate, and retail and consumer products are expected to see a drop, as are health care and biotech, among private equity firms.

Expectations of downturn

The companies’ M&A plans come as executives anticipate a growing risk of a downturn: 72% of private equity funds and 56% of venture capital companies expect to see a recession within two years. Expectations of a recession increase to 92% and 87%, respectively, when that time frame is extended to four years.

As a result, fund managers are shifting their capital allocation strategies: 28% of private equity will be directing the most funding toward their working capital over the next 12 months, a big jump from less than 1% a year ago. On the venture capital side, the figure is 41%.

Many fund managers also have exit strategies on their mind: 30% of private equity and 20% of venture capital are looking to exit investments. That percentage rises to 36% of private equity firms and 21% of venture capital companies among those anticipating a downturn within two years.