By Christof Huth and Thorsten Groth

Economically, the dominant topic for 2020 was Covid-19 and its impact on deal-making, on portfolio companies and on daily life. By now the Private Equity (PE) industry has become used to successfully dealing with Covid-19-related restrictions during deal-making and is focused on companies' development outlook beyond Covid-19. For the remaining months in 2021, PE professionals expect a positive development based on the already strong deal flow so far.

This article features an interview with Roland Berger's investor support experts Christof Huth and Thorsten Groth on the outlook for the European PE market, and with Roland Berger's digital expert Ulrich Kleipaß outlining the increasing relevance of technology and software assets for the PE business.

What outlook for PE-related transactions do you expect in 2021?

Christof Huth: According to the European PE Outlook 2021 , PE professionals throughout Europe have a distinctly positive outlook for 2021. This positive momentum in deal-making has already materialized in the first months of 2021, when deal flow has been particularly strong. Geographically, PE professionals see the best growth outlook for 2021 in Germany, followed by Scandinavia and Benelux.

Thorsten Groth: Industries of particular interest to the PE industry in 2021 continue to be "technology and software" followed by "pharma and healthcare" and "business services". Activity in "technology and software" had already been very strong in 2020.

Why are PE companies so interested in technology and software assets?

Christof Huth: Technology can definitely be regarded as a Covid-19 winner. As the white-collar workforce has shifted to working from home in a very short space of time, companies need sophisticated technological solutions that allow their employees to stay productive in their home environment – beyond video-conferencing tools. With Covid-19 as a catalyst, companies also see the potential to further improve efficiencies by adopting digital solutions.

Thorsten Groth: From the perspective of a PE firm, software companies tend to be interesting for three reasons: First, software companies exhibit high revenue growth due to increasing digitalization needs across most industries, and they've often shown strong resilience during this crisis. Second, due to the scalability of their solutions, most companies tend to be highly profitable with strong cash conversion. Third, there are many verticals that are still fragmented enough to allow for attractive growth opportunities through buy-and-build. This is also why we invited RB Digital Partner Ulrich Kleipaß to offer his perspectives.

Covid-19 has exposed backlogs in digitalization across all industries. What priorities have companies set in terms of digitalization and what challenges do they face?

Ulrich Kleipaß: Covid-19 accelerated the demand for technological solutions and also provoked a major shift of digitalization efforts from establishing new business fields beyond the core value chain to focusing efforts on core business processes. More specifically, we currently see companies increasingly using digital solutions in order to make their core business processes more efficient and robust. Specific challenges for many companies exist in modernizing IT structures, which often still include many silo processes.

Which major technological trends support this development?

Ulrich Kleipaß: The major technological trends are artificial intelligence (AI) and cloud computing. Artificial intelligence is somewhat of a slow-moving trend. AI has tremendous potential to render processes more efficient and create huge savings through automation, prediction and personalization, yet it is still hard for companies to identify good use cases for AI. While industry-specific use cases for AI will likely take some more time to be identified and implemented, we expect to see more industry-agnostic AI tools being rolled out soon – for example, call center automation through voice-enabled chatbots. For cloud computing, we're currently seeing a major shift from on-premise to hybrid to full cloud solutions.

What role will digital platforms play going forward?

Ulrich Kleipaß: There will be an increasing trend towards digital platforms, even in conservative and complex industries. In healthcare , for example, Covid-19 has significantly shortened the timeline to build and offer platform solutions to patients, doctors and insurers as the demand from all sides increased during the pandemic, particularly for telemedicine. In contrast to price comparison websites or search engines, we expect no "winner takes it all" platform in more complex industries where processes are longer, more complex and include more stakeholders. Instead, we expect various platforms for different use cases. Taking the healthcare example, we expect that there will be separate platforms for appointments, telemedicine, diagnostics and so on.

From the perspective of PE firms, how can the commercial potential of technology companies be evaluated?

Ulrich Kleipaß: There are various factors to be considered when evaluating the commercial potential of technology companies. These include a review of the fast-growing market, customer trends and competitive dynamics. Additionally, the uniqueness and scalability of a particular technology solution and its technological backbone need to be scrutinized. In this context, Roland Berger can draw upon the extensive resources of our global Digital practice.