By Antonia Halliday
The past two years have been notably challenging for PE backed companies, especially in the technology sector. With global macroeconomic instability, rising interest rates, and a disconnect between buyer and seller expectations, the tech sector has faced significant headwinds. Deal activity plummeted in 2022, with private equity exits falling by over 30% compared to 2021, and IPO opportunities shrinking to a trickle. The total value of IPOs and M&A deals in the tech sector in 2024 YTD has been c. $98bn – down c.90% from the same period in 2021 (Pitchbook) Valuations were hit hard, leaving many companies unable to find suitable exit opportunities or justify recent valuations with more conservative valuation metrics applied.
This downturn was particularly problematic for PE investors many of whom had underperforming portfolios, a lack of liquidity and pitifully few new investment opportunities. Yet, despite this turbulence, recent signs suggest that the tech sector is entering a more optimistic phase, as valuations stabilise, and the IPO window begins to reopen. In this transitional period, having the right Chairman and Board becomes even more critical as companies look to speed out of the blocks, and accelerate towards an exit, picking up some lost time in a ten-year fund.
The Chair’s Role in a Complex Environment
As the technology sector begins to recover, many PE-backed companies are now evaluating changes to the leadership team, and the Board, to address this new, and more optimistic, reality. Quite often the team that helps to navigate the company through a downturn, benefits greatly from a refresh when the market turns. Teams can become stale and inward looking through these periods and one or two new additions to the team can make the world of difference. Often this needs to come from the top and we are seeing quite a few CEO and Chairman changes well underway and an increasing number of Board searches starting in recent weeks.
The Chair acts as the bridge between PE investors and management, ensuring that the company is aligned with the goals of both parties. During the tough market conditions of the past two years, successful Chairs have provided stability and have kept management focused on long-term value creation and operational resilience rather than veering too far off course as the company looks to shore up declining performance in a tough market.
Now, as dealmaking resumes and IPOs re-emerge as a viable exit option, the Chair must be adept at shifting modes and playing a pivotal role in preparing the company, and the team, to seize these new opportunities. A proactive and engaged Chair will now be leaning in and focusing harder than ever as they guide strategic clarity, manage expectations around valuation, and ensure that the business is operationally sound and well-positioned for growth. Now is not the time for the Chair to be taking a breather after a tumultuous period, despite how tempting that might be.
Assembling the Right Board
Having the right board is now a necessity, not a luxury – it is increasingly essential for maximising value. PE-backed tech companies must construct Boards that bring industry-specific expertise, commercial acumen, and deep knowledge of M&A and exits. With a still limited but improving exit landscape, a Board equipped with experience in successful IPOs or strategic M&A deals will be critical. Furthermore, as buyers and sellers continue to struggle to align on pricing, Board members with strong financial and risk management backgrounds can help navigate these tricky negotiations.
To ensure they have the right talent around the table, PE firms should focus on recruiting Board members who are flexible and able to adapt to changing market conditions. Given the uncertainty of the last two years, ongoing evaluations of Board performance and adjusting the composition as necessary can ensure that companies remain agile and prepared for any scenario.
Moving Forward: Capitalising on the Recovery
With market conditions slowly improving, PE firms are under pressure to free up capital and return it to investors. This creates an imperative to unlock the value of portfolio companies that have been stuck during the downturn. The right Chair and Board will be pivotal in executing these exit strategies. By maintaining close alignment with investors, fostering collaboration among Board members, and driving strategic initiatives that prepare the company for either a sale or IPO, the right Board can make all the difference.
The challenges of the past two years have underscored the importance of strong governance in PE-backed technology companies. As the tech sector enters a more positive phase, PE firms must ensure they have the right Chair and Board in place to navigate the recovery and quickly maximise value for investors. Now is the time to focus on ensuring that you have leadership that is both adaptable, balanced and strategically aligned to capitalise on the plentiful near-term opportunities that lie ahead.