2025 Perspectives in Private Equity: AI & Technology
Technology continued to be an industry of particular focus for private equity (PE) through 2024. Blackstone’s $16 billion acquisition of data center platform Airtrunk was the largest deal of Q3 2024, according to Ernst & Young data, and tech deals accounted for 40% of all private equity deployment by value in the third quarter.
Software-as-a-service (SaaS) remained a strong market for PE deals. That segment has long been a well-understood vertical for PE investors intent on capitalizing on tech-driven innovation, and it proved more resilient than others as deal markets bottomed out over the past two years.
Despite its relative strength, technology investing has not been easy of late, with choppy growth prospects for many software companies, a mismatch in valuation expectations between buyers and sellers and an initial public offering (IPO) market that was all-but closed.
In a higher rate environment, the assumption of multiple expansion has gone away and private equity has shifted its attention to not just growth prospects but also sustainable cashflows and a clear path to enhanced profitability in tech targets. Private equity is best placed to scale businesses, exploit synergies via buy-and-build and boost operational efficiencies and effectiveness, and given the fast-growing nature of companies in the sector, there is plenty of alignment with PE.
Capturing the Upside in Gen AI
Amid the hype surrounding potentially transformative technologies like generative artificial intelligence (AI), private equity investors have increasingly focused attention on AI’s potential to overhaul business models and drive operational efficiencies across the economy. Viewing AI principally as an enabler in portfolios rather than a standalone investment opportunity today, there is limited appetite among PE firms to back the development of new AI tools but rather to deploy them as value-creation levers.
Currently, investments into AI businesses have tended to involve either venture capital investment in relatively early-stage companies or growth capital supporting the initial scale-up, with limited numbers of mature company IPOs or buyouts. We expect that investment cycle to continue through 2025, as AI remains a key area for PE to track—and maybe even pursue minority stakes—but does not yet present a meaningful dealmaking arena.
Several aligned verticals do throw up opportunities, with perhaps the most notable being the need for more energy-efficient infrastructure to support AI’s growth. In line with the general trends towards digitization and cloud storage, AI is putting huge demand on energy-guzzling data centers. That in turn is powering an emerging ecosystem of clean energy companies seeking to make those processes both more energy efficient and greener, with that clean technology infrastructure space throwing up investment opportunities for PE.
Backing Cybersecurity
Cybersecurity investments were one of the big themes of 2024, with the rapid pace of technology adoption and increasing regulatory pressure around cyber-resilience driving a focus on security tools.
The scale of cyber threats is increasing as a result of global geopolitical instability and many cyber-technology companies have been able to shape their business models to appeal to the PE appetite for SaaS solutions. With private equity keen on scalable, often data-rich, assets with recurring revenues, the large and growing cybersecurity market has proved fertile ground for those looking to put capital to work, and that should continue in the years to come.
Looking Forward to a Deal Pickup
As with other sectors, technology investors have not been immune from the headwinds of capital constraints and bid-ask spread challenges brought on by higher interest rates in the last two years. Moving into 2025, we anticipate stronger deal flow across the sector as rates start to come down, credit markets continue to ease and valuation expectations stabilize.
It is too early to tell how the new governments in the U.S., U.K. and elsewhere will impact technology investments, but we can expect deregulation to be a theme under the Trump presidency. The U.K. and European Union have been driving many of the regulatory advances in relation to AI, e-commerce, data privacy and cybersecurity and that will continue, though we can perhaps look forward to a period of bedding down of some of the newer legislation.
We anticipate some unlocking of the IPO markets in 2025, though it is unlikely that there will be a flurry of activity: the filing by Swedish fintech firm Klarna for its much-anticipated U.S. IPO could result in a multibillion-pound valuation, but there may not be a queue of others that can achieve the same. Absent a capital markets resurgence, we expect to see more private equity take private activity and strong interest in those companies in the more developed tech hubs in the U.S., Europe, the Baltics and the Middle East. The excitement around the recently formed MGX suggests that 2025 could be a stellar year for private equity investors in AI and related technology.
