Valuation in the digital sector: a glittering alignment of the planets.

Alexandre Folman, founder of Crescendo Finance says: “The acceleration of the digital transformation of companies is increasing the need for qualified resources in an unprecedented way. The resulting scarcity of available experts puts the digital value chain under pressure and in turn increases the value of all its links”.

Alexandre Folman, founder and managing partner of Crescendo Finance

The Covid crisis differs in every way from the subprime crisis as far as the technology sector is concerned. In fact, it’s even working in reverse. Whereas a dozen years ago, the rise of risk premiums (temporarily) dried up financing flows, valuations are now constantly breaking records. What has happened? In reality, scarcity has changed sides. Indeed, there is no longer a lack of capital, far from it. The current monetary environment and the abundance of savings are actually causing the private equity industry to bend over backwards in terms of liquidity, which must now be employed on a massive scale.

The problem lies in the investment opportunities. Much has been said about the health crisis which, by imposing teleworking, has reshaped organizations towards more mobility and agility and accelerated the digital transformation of the economy like never before. However, due to a lack of access to key resources and the ability to deploy them expeditiously, companies, especially large corporations, are forced to outsource the transformation of their organizations.

The simultaneity of these needs, which are instilling the entire economy at the same time, has primarily resulted in reinforcing the predictability of the business models of the stakeholders best positioned to respond to these needs, whether they are IT service companies, publishers or other startups. This favorable configuration provides private equity players with the two primary qualities they are looking for, resilience and growth, and whets the appetite of industrialists keen to internalize these disruption drivers. This leads to a continuous influx of capital towards the best companies and an unprecedented inflation of valuation multiples.

There is another consequence to the acceleration of these transformations. The resulting hypergrowth of digital players is in turn hampered by another scarcity, that of qualified human resources in the most sought-after areas of expertise, such as Big Data or cybersecurity. This scarcity is accompanied by a growing mobility, or even autonomy, of these resources, as shown by the rise of freelancing, wage portage and marketplace-type models, designed to facilitate the meeting of supply and demand for key skills.

It also leads digital players to structure their own internal training centers and shifts this tension to the entire training sector, which is called upon to meet the demand by creating new competence. This has resulted in high visibility in market plans and an unprecedented influx of capital. The recent surge in transactions involving IT schools clearly shows this growing interest, in a context of increased strengthening . And the increasing scarcity of available deals should keep valuation multiples high for some time to come.

Alexandre Folman is founder and managing partner of the investment bank Crescendo Finance.