AGC's Spring 2024 Tech Capital Markets Update

After closing the books across the Global Technology landscape for Q1 2024, we can only hope that what was an abysmal quarter for SaaS revenue growth at 13% and M&A transaction activity down 19%, marked rock bottom. AGC closed a number of great deals, two at 10x+ ARR, including ORTEC to Battery, Klaus to Zendesk (H&F), Nomadix to ASSA ABLOY, APS to IBS Software (Apax), and more, but it was still the worst quarter in our 20-year history. Goldman, with strong Q1 earnings, is saying that capital markets are back – maybe, maybe not, as global M&A is up 15% YoY on a value basis, but down 33% on a transaction volume basis. Mega deals in any quarter are obviously a huge boost to your banking performance, but history has shown that they are definitely not predictable, and it is not clear yet whether we are out of the woods on the entire M&A market or more specifically the technology market.

Over the last quarter, we have had at least 75 calls with Senior Partners at top Tech PE funds, representing roughly 1,500 portfolio companies. As you might guess, some share more than others 😊 but most shared a lot, and the consensus is that their portfolios are healthy with improved profitability, but growth rate acceleration has clearly not yet happened. Depending on the scale and maturity of SaaS companies in portfolios, we are hearing about average growth rates from 15-30%, implying that virtually any company with more than 25% growth in portfolios is an outperformer. Obviously, there are some SaaS companies out there that are producing 50%+ growth, but these are few and far between. Large enterprise SaaS sales with long deployment schedules are very hard to close in a market where buyers want to make smaller ticket commitments with faster deployments and rapid ROI. SaaS CEOs are battling more than they have in the past with renewals and are having trouble holding historical gross retention metrics. In other words, it is not clear if we have yet to hit the revenue growth inflection point in the global SaaS marketplace. So, don’t be surprised if we continue at the same revenue growth rates for a couple more quarters.

Deals are getting done but there are far fewer, they are smaller, and they are not all perfect. Suffice it to say that even with all the focus on optimizing performance in 2023, premier revenue growth is still extremely hard to achieve, which is limiting the supply of companies to bring to market, putting a big wrench in the M&A deal making machine. The premier companies that we are bringing out are getting preempted on a regular basis and those that are getting a full market check are generating 10x+ revenue multiples, in some cases on a forward basis. Many B quality deals, even with 10+ IOI bids, are still getting hung up on the bid-ask spread. When you move down from great companies to good companies, you have a dramatic difference in reception from buyers, particularly PEs, who after their sins of ’21 and ’22 are being told to hold their fire for only the best shots. This can leave you with a healthy marketing process that has strong engagement and competitive IOIs, and then the Monday morning investment committee squashes the deal you have been working on for five months. And not to be forgotten is the new due diligence checklist item of the impact AI has on virtually every company’s future roadmap.

All that said, there are reasons to be hopeful even in these early challenging days of 2024. Dry powder is increasing because deal activity is down, and new funds are still being raised. Tech companies across the land are healthier after more rigorous focus on performance and oversight by their shareholders. The number of companies looking to transact keeps accumulating as holding periods mature and life goes on without liquidity. Fund Partners would like to hold companies beyond projected hold periods to meet target returns, but pressure for DPI will force the portfolio companies out sooner at lower returns. PE Portfolio companies continue to be our best buyers but strategics are jumping back in the game in Q1 as you saw with a surge in deals: Synopsys / Ansys, Hewlett Packard Enterprise / Juniper Networks, and Zscaler / Avalor. A few PEs have chosen to exit some of their premium companies and have achieved exceptional valuations, arguably better than the heights of COVID, e.g., JMI Equity’s sale of Incident IQ to Cove Hill and Insight’s sale of Jama Software to Francisco Partners. This is a testament to the powder keg of dry powder, itching to make platform investments with virtually no premium companies available on the market, creating an explosion in pricing.

For some good news-bad news, after watching the $2T deficit budget bill and the incremental $100B foreign war funding bill fly rapidly through Washington and having sat down last week with one of the senior leaders in Congress, I no longer believe that our government is going to cut back on the mega deficits. So, let the deficit-driven economy continue at full steam. We hope we have hit the bottom from a growth perspective and better performance will be the biggest driver to increased transaction volumes. Anecdotally, pitch volumes and new engagements have picked up dramatically, which we hope will convert to many more closed deals in the last quarter of 2024.