Software & IT Services Market Review Q1 2021

Gambit’s Software and IT services (SITS) market review for Q121 sets out how businesses have commenced 2021, considers the growth drivers resulting from the pandemic and the consequences for trading performance, M&A activity and capital investment within the sector.

To read the full report, please click here.

Q1 Report Summary:

  • Market participants entered 2021 with optimism, following a resurgence of sector M&A and capital investment activity in H220. This trend has continued into Q121, with UK M&A volumes exceeding pre-pandemic levels to reach their highest recorded volume since Q119.

  • Further encouragement has been taken from a rallying of share prices and public valuations in recent months. Gambit’s SITS valuation index shows an appreciation in average EV/EBITDA multiples of 3.2 from Q220 to 19.7x. This has been driven by demonstrable resilience to Covid-19, with many businesses outperforming pre-pandemic results and utilising investor confidence to revisit growth strategies and M&A.

  • Confidence and activity is high in all SITS markets, from fintech start-ups to investment by well-established private equity players in maturing markets such as managed services.

  • Mirroring the requirements of end-users to reset and adjust to the pandemic environment, SITS businesses themselves have altered inorganic growth plans by devising M&A strategies focused on accelerated capability enhancement, ease of scalability and exposure to fast-growing industry verticals.

  • Encouraged by the sector’s resilience to the pandemic, strategic acquirers have undertaken aggressive buy-and-build strategies and are considering how best to align portfolios to meet the demands of the post-covid landscape. M&A volumes have continued to gather momentum and increased by a further 4% from Q420.

Concluding Remarks:

  • This latest wave of consolidation reflects the recognition that quality assets within all subsectors of the software & IT services industry are highly sought after, requiring investors to execute timely M&A strategies in order to maintain competitive advantage.
  • We expect software & IT services companies to continue to prosper and demonstrate healthy trading performance in 2021, driven by the acceleration of digitisation across all industries. The disproportionate attention from investors looking to deploy record levels of capital will spur an active M&A environment and provide an opportunity for those looking to exit at historically strong valuations.
  • The next quarter presents a significant window of opportunity for business owners to utilise the current Capital Gains Tax regime, which was expected to be negatively modified during the Chancellor’s Spring Budget. It is likely that the Chancellor will revisit the reforms in the Autumn, when additional tax rises may feature.

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