In September 2023, Jefferies hosted its seventh annual Tech Trek, Israel’s largest institutional investor conference. The three-day event connects leading global investors with the Israeli tech ecosystem through a series of panels, presentations, and meetings.
Jefferies sat down with Bernard De Backer, Partner in StepStone Group’s private equity division, to hear his perspective on tech sector performance, regional disparities in the global economic recovery, untapped investment opportunities in Europe, and more.
Tech Exposure: Is Concern Warranted?
Investors have worried about their tech exposure amid nearly two years of sector volatility. Tech shares fell over 30% in 2022, outpacing the broader market’s decline, and these challenges bled into private markets. By Q2 2023, year-over-year tech valuations were down 14% in Series A rounds, 9% in Series C rounds, and 33% in Series D rounds and above.
Today, a strong earnings quarter and resilient economy may suggest a tech sector rebound. As we approach 2024, should investors still be concerned about their exposure?
De Backer, advising clients from sovereign wealth funds to foundations, is cautiously optimistic. Tech forms nearly a third of his clients’ exposure, a proportion he believes may grow.
“Medium to long-term, I expect our clients to remain supportive of tech investing. Their exposure may rise even further,” De Backer shared. “Tech and software investments remain very compelling.”
Acknowledging valuation challenges, he underscored the resilience of private markets, highlighting companies with solid financial models like software as a service (SaaS). These businesses fared much better than their growth-oriented and public market counterparts. As markets rebound, De Backer expects private tech companies with reliable models to lead the charge.
The Global Recovery: Europe’s Untapped Potential
De Backer discussed regional disparities in the global recovery, with the U.S. leading the way. The U.S. reported 4.9% GDP growth in Q3 2023, more than double the second quarter’s pace. The country’s GDP recovery and labor markets continue to outpace other advanced economies.
“I think the U.S. is five or six months ahead of Europe in their tightening cycle,” De Backer said. “The U.S. was coming off a very robust market, and it created enduring tailwinds and financing. It remains the world’s most active market.”
October inflation data boosted the United States’ economic momentum, as headline inflation fell from 3.7% to 3.2%. The drop reduces the likelihood of an interest rate hike at the Fed’s year-end meeting. Similarly, in the United Kingdom, a sharp drop in annual inflation from 6.7% to 4.6% reduced pressure on the Bank of England to continue aggressive measures.
Despite its tepid recovery, De Backer still sees untapped opportunities in broader Europe. StepStone aims to capitalize on several key advantages in the region:
- Europe boasts a larger pool of software engineers than the U.S. With lower median salaries, they represent a cost-effective talent base for tech entrepreneurs. This is a driving factor in Europe’s growth as a hub for new startups. The region is now home to over 150 ‘unicorns’.
- Europe has fewer specialized tech investors than the U.S., leading to lower overall market capitalization. This creates opportunities for valuation arbitrage that seasoned investors like StepStone Group can seize.
- There’s room for consolidation in Europe’s tech market. Unlike the U.S., many European tech niches and platforms are still independent. There’s great potential for strategic M&A to drive growth and returns.
Secondary Markets and GP-Led Transactions
The conversation closed on the topic of secondary markets. As IPOs and dealmaking remain subdued, secondary markets have stayed active, especially for GP-led transactions.
“Secondary markets are attractive. If you look at the ratio of money raised to opportunities, it’s a very strong ratio,” De Backer said. “A big opportunity set for investors.
De Backer emphasized the appeal of diversified LP positions, rather than investing too much in concentrated GP vehicles. Still, under the right circumstances, transactions with general partners remain attractive.
“We look for strong assets combined with a very strong GP. That combination is critical.”
Bernard De Backer’s insights offer tempered optimism, undergirded by resilient private markets and unrealized growth in Europe. As developed economies rebound, challenges are expected, but investors focused on sustainable business models and under-penetrated markets will find exciting new avenues for growth.