While software companies have experienced significant valuation drops, services companies have largely been insulated from this, due to their fundamentally different business model. According to private equity leaders we have spoken with, services companies are generally viewed as lower-risk investments, especially compared to software and SaaS businesses.
Services companies typically enjoy steady, predictable and profitable revenues — which makes them attractive targets for private capital investors.
The pace of technological advancements shows no signs of slowing down, and for tech services and tech-enabled services players, this continues to create vast opportunities. Each new generation of technology creates a fresh set of needs and possibilities within the market, and tech services is essential to the rapid evolution.
Over the past 25 years, we've witnessed a range of transformative changes — going back to the Y2K crisis and the dot-com revolution — through to the emergence of mobility and new computing forms, to the rise of cloud computing — and the widespread adoption of technology in both consumer and enterprise settings — none of it possible without tech services. Private capital investors understand this and are eager to invest in services companies and grow them to take advantage of these opportunities.
The nature of private capital involvement
Private capital firms are increasingly investing in both smaller, founder-led companies and larger, professionally led companies in need of transformation. In both scenarios, the buyers are looking for external leaders who can drive growth and improve performance.
In smaller companies, founder-transitions can be complex and if not done correctly, run the risk of derailing business performance. In some cases, while the founding team has built the business to its current state, they may have run into performance ceilings or lost motivation for continued growth at pace, leading them to step back and seek to monetize their investment. Private equity firms step in here to drive accelerated growth, performance and ultimately value creation. While these transitions can be challenging and disruptive, executed thoughtfully they can bring tremendous value to the owners and position the company for even greater success.
For larger and more mature organizations, PE firms may intervene to strengthen the operating platform for continued scale. That may include process and systems upgrades or overhauling operations and revenue streams to make the company more client-responsive, competitive and high-growth. As in smaller companies, these kinds of changes pose the typical challenges to any business transformation, in particularly a risk of business instability or significant inertia.
Tech services remains the underpinning of transformative technological change. PE firms are looking for leaders to help them tap into this opportunity.
Regardless of company size or the long-term goals of the purchase, private equity acquisitions often involve leverage, which can put pressure on the portfolio company’s P&L and cash flow. Often, private investment is a good time to re-evaluate and evolve the services the company takes to market, thoughtfully reprioritizing the company on more value-added, competitive offerings.
In every scenario, as soon as a PE firm invests in a company, they will want to make meaningful changes to drive business growth and value creation. They will evaluate the company’s current state, its potential for growth, and its talent landscape in the context of that transformation.
So, what does this mean for executives who wish to move into leadership roles in private capital or PE portfolio companies?
Implications for leaders looking for portfolio company opportunities
Executives seeking to transition into portfolio company roles must first have a thorough understanding of how private capital firms operate. They place significant emphasis on growth, brand positioning and developing unique propositions, all with a strong focus on profitability and value creation. While investment horizons may differ based on the firm’s investment strategies and goals, the primary operational objective is usually to generate revenue and enhance efficiency and financial performance.
For executives seeking to enter the private equity world, they will want to highlight their experiences and leadership traits that demonstrate a strong focus on value creation. Private equity firms will want personally attributable success stories, particularly those that emphasize a strong results orientation. This can sometimes be difficult for executives who have operated in larger, more established companies where their personal impact may be harder to distill. But examples of improved business operations or business unit growth are particularly relevant when private equity owners seek portfolio company leaders.
With the evolving dynamics and interplay of capability clusters, cost and labor arbitrage, geopolitical risk, time zones, trade-offs between onshore, nearshore, and offshore, and investment horizons, it’s important that leaders bring a global and well-informed perspective to the table to address these strategic tradeoffs.
Investors are seeking executives who understand how private capital firms operate, and how they can drive both profitability and value creation.
Privately owned businesses are also seeking executives who are comfortable and adaptable in both large-scale and resource-constrained environments. Operating effectively at a high level, regardless of scale, is highly valued by private capital firms and experience in both contexts, large and small, can make executives more appealing to investors.
Furthermore, executives should understand the motivations behind a private capital firm’s investment and have a defensible thesis of their own on the rationale behind the investment. When engaging with investors, executives can position themselves as valuable and trustworthy thought partners by demonstrating an educated point of view not only on the portfolio company itself and its growth potential, but also on the broader industry.
Beyond this, it’s wise for potential portfolio company executives to familiarize themselves with the firm they will work for. And given that investors are likely to be conducting their own background checks, having a robust network and strong reputation is always an asset.
While networking opportunities are available for candidates in the tech services domain, interim or advisory roles within private capital firms can also offer hands-on experience in both the tech services industry and in the world of private capital.
Conclusion
With the continuous evolution of tech services and the rapid technology cycles prevalent today, it’s clear that the winners of tomorrow will be companies that are able to adapt and respond quickly. Often larger companies are fast followers but are not the innovators in responding to rapid technology evolution. It is therefore no surprise that smaller, agile companies will pioneer the early trends that will shape the entire industry.
Consequently, leaders within these companies must not only establish the pace but also set the direction for the future of the industry. In addition to contributing to value creation, executives leading private equity portfolio companies bear an implicit responsibility to influence the industry's trajectory.
While this presents an exciting and rewarding moment for high-level executives in the tech services domain, the potential for significant impact also demands a profound sense of responsibility towards the industry’s future.