Investors are clamoring for profit from venture capital firms and startups, even as the IPO market is still in a recovery state, reflecting lingering economic anxieties and other factors. 2024 IPOs exceeded last year, but activity remains below normal levels, law firm Ropes & Gray said in an October report.

That dynamic drives VCs and more mature startups to create liquidity by selling to private equity, even if the rewards are often not as staggering as in a public offering.

Meanwhile, EP activity in the technology sector is picking up.

Technology as a percentage of total PE deal value was 28.3% in the third quarter, up from 18.7% in the second, as buyers and sellers found it easier to agree on prices, according to the analyst of private equity from Pitchbook, Garrett Hinds. Capital was cheaper and PE buyers could pay a little more. “Some of the venture capital-backed companies that have been private longer and have enough scale have been on the radar of private equity,” Hinds said.

Looking ahead, he said, private equity buyers may expand their interests beyond the highest-quality targets that were evident in the third quarter.

Notable private equity acquisitions this year include KKR and Dragoneer Investment’s $4.8 billion deal for education technology company Instructure Holdings and Bain Capital’s $4.5 billion acquisition of financial technology company Envestnet.

Private equity interest in technology has been growing for years. Technology accounted for 43.3% of PE deal value in the second quarter of 2022, according to Pitchbook.

The increase in 2022 reflected Elon Musk’s acquisition of Twitter, now X, according to Hinds. A big PE-backed technology company privatization could happen again given historic dry powder levels. “It could happen with a PE-backed consortium, such as multiple firms sharing equity, and possibly a consortium of private lenders to back the debt financing,” Hinds said.

But PE firms are also very selective when it comes to acquiring technology companies. Where VC firms place many bets and hope that a few will turn out to be big winners, PE buyers look for companies with a reliable business model that they believe they can take to the next level.

PE firms are particularly attracted to software companies with subscription business models and stable, recurring revenue, although they will also look for growth opportunities in other sectors, such as AI-enabled data infrastructure offerings, according to partner Ropes & Gray, Kate Withers.

All of this means that PE can be picky and not prone to overpaying.

Lane Bess, chief executive of cybersecurity startup Deep Instinct, said his family office, Bess Ventures, invested in companies he believed would have a chance to go public within two to five years – and many of them have aged beyond this time frame. , according to Bess.

“And now we’re going into 2025 and they’re saying, ‘Hopefully the window will be open next year,'” billionaire Bess said. He previously served as president and CEO of Palo Alto Networks and chief operating officer of Zscaler. .

Three years ago, many cybersecurity and other tech startups were valued at 12 to 15 times forward earnings, he said. Now, those valuations are in the range of six to 12 times revenue multiples in many areas except for a few, such as AI and some software-as-a-service players, according to Bess.

A private equity exit may not be as profitable or satisfying as ringing the stock market bell to celebrate a successful IPO. And measured realism feels alien in the tech world, synonymous with the go-big-or-go-home mentality.

But it could have a positive knock-on effect for tech startups, discouraging fringe companies and investors from contributing to endemic bubbles.

Still, the idea is a tough sell for some, including Bess.

“Personally, selling my company to private equity would be my last choice,” he said. “That’s because they’re likely to cut costs all the way through and possibly let the company sit for a while until they find another way to combine the company or produce a strategic valuation or re-enter the public markets. “

Others may not share his sentiment.

“A lot of it comes down to investor and board dynamics, to get liquidity,” Bess said. “There is a lot of anticipation. Investors are now saying, “Look, you know, my money is tied up in that company for a long time. I would be quite happy to see a way out. “

Write to Steven Rosenbush at [email protected]