You need to have faith, hope, and $7.2 trillion in fiscal and monetary stimulus behind you to power through the COVID-19 pandemic. Our early read of the new post-COVID normal is that the tech M&A market will be in short supply of companies for sale until September. PEs are not likely to be selling portfolio companies until the COVID storm has passed. And while VCs may be more willing to sell, it will be driven by portfolio restructuring, i.e. cutting loose underperforming investments to free up time and capital for perceived winners. This will likely result in a leaner market not just in quantity, but also quality. The good news is, deals going to market right now are getting a ton of attention. While PEs may be on the sidelines as active sellers, they are lined up in droves as buyers, and their pockets are very deep.
The tech M&A business is decelerating rapidly as of this writing. Q1’20 volume was 853 deals vs 850 in Q1’19, surprisingly solid! First week of April volume is down 30% and it will get worse as we progress through the quarter. That said, the S&P 500 is only down 3% over the last 12 months, an expression of confidence that the worst is over. It will be interesting to see whether the Strategics will take back ground from the PE players in these challenging times after giving up so much tech M&A market share over the last 5 years. We estimate the Top 200 Tech PE Funds to have over $1T in tech AUMs including significant dry powder. On the tech VC front, by COVID-19, we expect them to be busy identifying companies for disposition. While cash deals will be harder to come by because of the virtual shutdown in the debt markets, equity swaps with the PE-backed strategic will proliferate.
The attached deck covers some of the latest data on tech M&A. In the meantime, AGC Partners is powering forward with 10 LOIs when the COVID crisis hit, two closed deals since then, and preparing for a very, very big Q4.