Few industries have bypassed the disruption caused by new technologies in recent years. What’s more is that this global trend is accelerating, leading businesses to adopt new tech more quickly, so creating further disruption.
And while the public-market sell-off in tech stocks has been well documented, the uneven nature of this shift is not so well known. For example, enterprise software companies, with attractive recurring business models and lower correlations to economic growth, have shown greater resilience than other segments of the technology sector.
These changes are creating both short and long-term buying opportunities for investors. The first group is being driven by the current market uncertainty. The second, however, is being driven by technology adoption causing secular shifts in economies.
Long-term tech trends persist
Global information technology spend has increased by more than a fifth over the past decade and is expected to exceed $5 trillion by 2025. These trends are fuelling a surge in software and services companies, which are forecast to number more than 100,000 by 2025, representing a combined projected enterprise value of over $65 trillion. With around 97% of those companies expected to be private, the market for new deals is unlikely to dry up any time soon .
The secular growth of the software industry is one of the most important and persistent features of the modern economy. Sector by sector, software is revolutionising business practices. Over the past 50 years, users have grown from a restricted group within government and financial services to a cloud-first population permeating almost every aspect of modern business.
Performance and efficiency tailwinds are the trends underpinning these long-term shifts. Increasing digitisation across industries and workflows of all kinds has resulted in software applications infiltrating what were once niche markets.
Deal flow has slowed, but tech shows resilience
The inflation that arose after the easing of lockdown restrictions and was made persistent by supply side problems following the Ukraine-Russia conflict has forced central banks to tighten monetary policy at a faster clip than expected. This in turn has sent equity indices tumbling, with tech stocks suffering some of the worst effects.
Pricing and valuations
The repricing of tech stocks has taken some of the froth out of private market valuations, potentially creating new opportunities for private equity investors to buy in at more attractive entry points. While tech valuations remain high compared to other industries, tech sector enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) multiples eased back slightly to 20x this year from 21x in 2021 .
Some technology sub-sectors have proved to be less volatile during this current period of market stress. Enterprise software providers, for example, have declined by 24% this year compared to a drop of 56% for consumer and internet software businesses and a fall of 46% for the software-as-a-service index as a whole .
Software companies have also historically been faster to recover after periods of economic distress while also outperforming the rest of the market during those downturns. That is largely down to the strength of the long-term digitisation trends underpinning tech companies, as well as the robustness of many software business models. During the global financial crisis, software and services businesses significantly outperformed the broader market, with EBITDA only declining slightly in 2009 compared to a 50% drop for the S&P 500. Meantime during the pandemic, the sector maintained double-digit EBITDA growth. That suggests some investors may view software sector investments as a defensive play with the potential to protect any market volatility while also benefiting from those long-term upsides.
The way ahead for tech
While the macro environment is still uncertain, we believe that the tech sector will continue to be supported by long-term digital transformation tailwinds. Domain specialists have a distinct advantage over generalists when investing in the space, given the advantages from repeat investing and network advantages. Given the current market dislocation, we view this as an opportunity for specialist GPs to generate strong returns by acquiring assets at cheaper valuations, while tech’s broader growth potential is likely to outpace other sectors in the long run.
 Pitchbook – Q2 2022 US PE Breakdown and Q2 2022 European PE Breakdown
 Statista, June 2022
 Capital IQ (5/23/2022). Summary of equal weighted, aggregate hypothetical growth in each category. Select Enterprise Software names include Adobe, Google, Microsoft, Oracle, and Salesforce. Select Consumer / Internet Software names include Block, Meta, Netflix, Spotify, Twitter, and Zoom. SaaS Index of 111 SaaS companies.