Certain industries are still attracting private equity buyers, even during challenging times. Tech service providers is one of them. What are dealmakers looking for and what is coming next for technology integration? Let’s take a look.
“The tailwinds in those spaces are extraordinary as technology continues to open up opportunity,” says Gunnar Overstrom, a partner at New York and London based private equity firm Corsair Capital. “As adoption and payments and software continues to grow, you’ve got great tailwinds and structural demands.”
From a financial perspective, Overstrom tells Mergers & Acquisitions that firms providing services in subsectors like payment technology, software services and business services have attractive incremental margins, a real ability to scale as well as grow, and generally speaking, are capital light businesses. The nature of such services does not require a constant flow of investment capital to drive growth which allows them to sit well in a private equity buyout mindset.
Among opportunities within the services sector that has attracted investor attention, Overstrom says that the big one remains B2B payments. Over the last 15 years, the payments landscape has evolved from consumer-facing offerings. Now, firms like Corsair have focused on the business facing payment tech firms.
“Only in the last two or three years has B2B payments started to really get traction and have people focus on it,” says Overstrom. “And obviously, the pandemic was a big kickstart for that.”
Dealmakers in the space are attracted to payments integrated into software as another post-Covid sector that flourished. Firms had to begin developing omni-channel and e-commerce distribution that was traditionally an in-store, physical transaction. Payment services are a great method for getting paid for helping a business get up and running and operate using software on the internet.
In 2022, Corsair acquired a majority stake in Hunger Rush, an all-in-one point-of-sale system with integrated software, payments, and digital ordering services for multi-site quick service restaurants (QSR) and fast casual operators. Overstrom notes the deal as a good example of payments integrated into software, in this case for the restaurant industry.
The underlying importance that all of these firms bring to the table is data integration. Dealmakers need to an eye on data and artificial intelligence, according to Overstrom.
“If you think about the next kind of a generation, we’re seeing it now in front of us with ChatGPT,” says Overstrom. “But really how AI will start to help us monetize data. And then a theme that rhymes has been automation. How well you can leverage automation has a lot to do with the data you’re capturing and how you’re applying AI, so those have all been very important topics for us in that kind of sub-sectors and topics for us under that broader umbrella.”
Where do you anticipate sectors to emerge within the financial and business services sector? Let me know at [email protected].