Market uncertainty caused by Covid-19 triggered a dip in Australian private equity (PE) deal activity in the second quarter of 2020. However, strong investor appetite in technology and software could pave the way forward for the industry, according to a new report by Herbert Smith Freehills.

The firm’s second annual private equity report — The Carry: Private Equity Insights — released today, highlights that while the pandemic impacted overall deal volumes in the first half of the year, investment in the technology sector remained healthy, accounting for approximately 30% of all completed deals.

Herbert Smith Freehills partner Clayton James explained, “The first half of 2020 was undoubtedly unstable for the economy and private equity alike. While deal volumes in the first quarter of 2020 were broadly consistent with those reported in each quarter of 2019, Q2 2020 saw a marked contraction in activity, with only six deals completed.

"For the year to July, fundraising stood at US$0.8 billion. While there are several months remaining in 2020, total fundraising activity may well fall below that of previous years. That said, further raisings may close in the remainder of the year and there is plenty of capital waiting to be deployed.

"We expect a significant proportion of this to go to the technology and software sector. Private equity investors are becoming more comfortable with allocating committed capital to software and technology investments, with tech investments potentially seen as a ‘safe haven’ during Covid-19.”  

According to the report, Australian venture capital experienced a strong start to 2020, with momentum continuing from Q4 2019 which saw venture financing reaching its second-highest ever level.

While the impact of the pandemic on the venture capital landscape remains uncertain, and long-term, systemic consequences may not become apparent for some time, Herbert Smith Freehills is still seeing capital raising activity, particularly in the technology sector.

Herbert Smith Freehills partner and Head of Venture Capital, Peter Dunne, said, “Although cautious, venture capitalists remain active, they have record levels of dry powder to deploy and new opportunities have arisen, particularly in tech.

"The pandemic has driven massive changes to working environments and behaviours and these changes have created investment opportunities for venture capitalists. The world is looking to technology and innovation to foster resilience from the pandemic, as well as to deliver future products and productivity.

"This is driving interest and activity in tech-based businesses including in communications, logistics, telehealth, fintech, biotech, mining tech, and digital fitness and wellness. Established tech companies will also see opportunities for growth through acquisition.”

In addition to the technology focus, the report makes further predictions for the remainder of the year’s private equity activity.

Mr James commented, “We can expect there to be longer hold periods as sponsors deal with ongoing market volatility, and we anticipate that a tight market for assets and high levels of dry powder in the private M&A market will lead some sponsors to continue to look to the public M&A markets for deal flow. The high level of committed capital across private equity sponsors means that the fundamentals are in place for a rebound in deal activity.”

Read the full report here.