Tech sector tops private equity wish list

Grant Thornton figures reveal EBITDA multiples increased 18 per cent in Q4 2010 compared with the previous quarter

The IT sector has become the strongest in the UK economy in terms of company valuations, market watcher Grant Thornton has revealed.

Its Private Equity (PE) Barometer report bases its figures on a quarterly survey of 100 UK private equity executives who have high expectations of the tech industry going forward.

Figures reveal that expectations of EBITDA multiples increased by 18 per cent in the last quarter (up from 6.5 times EBITDA in Q3 2010 to 7.7 times EBITDA in Q4 2010).

However, the number of respondents that expect to be most active in this sector fell slightly, with 29.3 per cent expecting a busier 12 months ahead – compared with the 30.3 per cent expressing the same sentiment in Q3.

Duncan Lamb, technology director at Grant Thornton UK, said: “It provides positive news that private equity investors still deem the sector an active target for 2011 and that the investor community is expecting multiples to rise again.

“2010 saw private equity groups making their return to the technology sector and this activity has helped it recover from the recession better than most,” he said. “Companies that provide specialist knowledge, particularly within software, have become hot property in the technology sector and PE investors will be looking to bolt on such businesses to build on their capabilities and better compete with niche players.”

Lamb also said differentiation will the key driver of valuations.

“Companies that have a niche customer base, Intellectual Property, a specialist capability, and those which represent new technologies and delivery mechanisms are expected to perform strongly. These will also be hot targets for the private equity community and other investors going forward,” he said.

"The shift in sector focus is no surprise put in the context of an uncertain economy and the shrinking GDP we saw in Q4 2010. The PE Barometer indeed shows that the sector is holding up remarkably well compared to some of the falls seen in other sectors such as industrial and materials,” Lamb added.