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:

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.”

One hot area for private equity deals in innovation last year was cybersecurity, following a few years of somewhat stagnant growth, the AIC report said. The report called out identify theft as affecting hundreds of millions of people in 2020 and 2021. To grow and innovate, more than 200 cybersecurity companies welcomed private equity investment to fund development, broaden offerings and open doors to other industries.

A surprising contribution of the private equity investor is the acceleration in moving ESG from a compliance burden to an opportunity to create value.

“This is the massive shift that we’ve seen in ESG just over the past 18 to 24 months,” Carnegie said. “It’s this big mindset shift that’s happened that looks at ESG not just as a set of discrete factors that have implications for particular types of companies, geographies or industries, and not just something that is seen from a risk management perspective.”

Carnegie said ESG is, for private equity firms, a top-of-mind conversation that is happening across the industry, even for firms that don’t have ESG in their agenda. “It’s recognizing the role that ESG plays in helping to build better companies,” she said. “If we take the example of cybersecurity, this is an issue that affects companies across the board.”

From that ESG perspective, Carnegie said her private equity clients would first confirm that they’re managing the risk associated with cyberattacks on their portfolio companies, but then they’d also look at the value creation side and consider how they can invest to contribute to solutions.

“It really is a sea change,” Mincey agreed. “In the old days, maybe two years ago, ESG was confined to impact investors or niche, special purpose funds. ESG was a red flag exercise and a risk exercise. But now, easily, 70% of all firms look at ESG factors in the early stages of deal evaluation. And at the bigger funds, it’s 88%. They’re looking at ESG and the value creation in the deal assessment and due diligence process.”

And despite the latest Washington, D.C., news surrounding the SEC’s new rules on private equity cost and performance disclosures, overall the panel was unperturbed by the change.

“PE doesn’t invest in the moment,” Mincey said. “What does the future for PE look like in a red or blue administration? It doesn’t matter. We don’t invest in the cycle, but through the cycle.”