Post-pandemic sugar rush or gradual recovery? In the tech sector, it depends where you look

Your expert for questions

Steve Roberts
Partner at PwC Germany
Tel.: +49 69 9585-1950
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New market dynamics overall…

Why has tech investment remained so strong? Essentially because of the way the pandemic has reshaped the market dynamics. For one thing, it’s triggered a dramatic shift in behaviour among businesses and consumers, as they accelerate their migration to digital channels for everything from baby food to beverages to banking services.

For another, tech has provided an attractive home for a large pool of capital ready and available for investment – seizing on the window of opportunity presented by very low interest rates. Although valuations are high, this is being led by hyper growth companies. Investors know the deals done during and after a recession tend to perform very well.

… but different sub sectors have different trajectories

However not all tech segments have benefited equally from this increased investment: looking across the industry, we can see that investors have particularly favoured specific areas. In turn this has led to different outcomes and growth projections for different sub sectors. 

PwC’s analysis has identified four recovery trajectories which are: 

• New normal – sub sectors where sustained demand will persist through and beyond the lockdown. These include the likes of telehealth and education technology, cashless payment, public safety, automation, cybersecurity and eCommerce. 
• Sugar rush – a short-term surge that will subside as the economy normalises. Sub sectors with this trajectory include consumer-to-consumer video conferencing, online gaming and consumer media. 
• Rebound – a slowdown in the immediate aftermath of the pandemic will give way to demand spikes following the reopening of society. Sub sectors like digital marketing, workforce analytics, enterprise software, or media production are on this path. 
• Gradual recovery – sub sectors where demand is heavily impacted by the pandemic and the ensuing recessionary conditions, and it’s still too early to call their performance further out. These include IT services and consulting among others.

Rising complexity

As these trajectories start to play out in the first few months post-lockdown, the deal flow indicates that Private Equity (PE) houses are focusing primarily on opportunities in the “new normal” sectors. But the overall growth potential in tech is masked by a further key impact of COVID-19 – which has been to introduce a once-in-a-lifetime level of complexity and uncertainty to an already difficult deals environment. 

The problem? That there’s value to be had from tech deals is beyond doubt. But with the pandemic sweeping away so many existing certainties and reference points, new approaches to identifying and realising value are urgently needed throughout the investment lifecycle. 

Two steps to take

So, what can investors do to seize the full opportunities on offer? In PwC’s view, two key things. 

First, conduct a comprehensive reassessment of your investment strategy and approach, including how you evaluate assets and potential opportunities. In the past you’ve probably used tools like market segmentation models and customer spending forecasts based on historical patterns. But it’s vital to revisit this approach in light of COVID-19

Second, deploy new technology internally. Specifically, you could consider using a “market and asset insight engine”, a new way of applying analytics and Artificial Intelligence to cut through market complexity and expose value that might otherwise remain hidden. Our experience shows that using such an engine can pay dividends by providing deeper insights at every stage – all the way from deal sourcing, through due diligence to post-deal.

Using tech to unearth tech opportunities

If you think about it, nothing could be more logical than using advanced technologies to guide and inform your investments in the tech sector. After all, what you’re ultimately investing in is technology’s potential to boost value in other sectors. So why shouldn’t those sectors include PE itself?