Think of “technology and innovation investing” and an advisor would be excused if “venture capital” wasn’t far behind.

But after a record-shattering 2021, where private equity firms put $1 trillion in capital to work, the biggest surprise might be that roughly $287 billion of that dry powder went directly to 2,687 deals in technology innovation across a wide swath of industries, according to an annual lookback by KPMG.

The M&A report found that:

  • Domestic deals still made up the bulk of PE transactions (72%) and outbound deals increased slightly compared to 2020.
  • The technology, media and telecom, and industrial manufacturing sectors led in deal value—together constituting 60% of PE’s total—primarily driven by the pursuit of digital transformation and tech capabilities.
  • The healthcare and life sciences, and consumer and retail sectors registered the highest growth rate in deal value—132% and 90%, respectively
  • SPACs continued to play an increasing role in PE funds’ exit strategy compared to traditional IPOs
  • PE firms increasingly incorporated ESG-driven investments into their portfolios

The American Investment Council (AIC), which is an advocacy and research group for private equity and private credit, reached similar conclusions in its just-released report, “Financing American Innovation: Private Equity’s Role in the Innovation Economy,” which examined exactly where those private equity dollars were going: buyouts of VC-backed tech start-ups, add-ons of VC-backed tech start-ups, software companies, cybersecurity companies and companies providing IT services.

A far cry from the image of buyout firms buying large companies to break them apart, funding innovation often means reaching further back into the lifecycle of a company and finding ways to support its growth that are outside the purview of venture capitalists.

“If you look back on last year, it was a very significant year for private equity. You saw a record amount of investment over $1 trillion. A lot of people don’t recognize that a lot of that money, approximately three-quarters of that money, went to small businesses with employees less than 500,” said AIC President Drew Maloney yesterday in a TwitterSpace discussion of these trends. “And out of that trillion dollars, a large portion is going into innovation. You saw a lot more exits from venture capital going into private equity, and I think part of the reason for that is we’re able to take the companies that were founder-based to the next level.”

Maloney was joined in his discussion by KPMG’s Global Private Equity Lead Glenn Mincey and Global IMPACT Lead Tania Carnegie, who analyzed what private equity is doing with tech, ESG and the SEC.

“We’ve said it before, but it’s still true—tech is no longer a vertical, it’s really a horizontal across all the other sectors,” Mincey said. “It’s retail plus tech, healthcare plus tech, hospitality plus tech, etc. It’s easy to see the need for applications, from inventory management software in a constricted supply chain world to customer experience apps.”

But the real matchup with private equity, he continued, isn’t just the need for a product, but the fundamental business imperatives themselves. A big chapter in the private equity playbook is to help companies scale and access larger markets to increase their customer base.

“If you look at smaller fragmented tech and software companies, they tend to focus on the tech aspect—that’s what they do best—rather than market-driven capabilities,” he said. “And they can benefit enormously from the economies of scale and sophisticated management that they get in a PE marriage.”

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