ChatGPT may be just the beginning, as AI spurs PE and M&A activity

AI, customer engagement, digital transformation and cybersecurity are hot, said Union Square Advisors' Wayne Kawarabayashi.

Wayne Kawarabayashi, Union Square Advisors

Investments in generative artificial intelligence and machine learning are heating up. In January, Microsoft announced the third phase of its “multiyear, multibillion dollar investment” in OpenAI, the developer of ChatGPT. And earlier in February, Google teamed up with Anthropic, including a reported $300 million investment in the AI startup.

To gain insights on the investment opportunities for tech in general and AI in particular, PE Hub spoke with Wayne Kawarabayashi, partner and head of M&A, at technology-focused investment bank Union Square Advisors. The firm is headquartered both in New York and San Francisco.

Kawarabayashi has over 30 years of investment banking experience executing over $200 billion in technology M&A deals, with an emphasis in software, enterprise IT, financial technology and IT services. Previously, he was a managing director at Barclays and Lehman Brothers.

Here are excerpts from the interview:

2022 was a volatile year for markets overall. What is your forecast for the tech sector heading into 2023?

Naturally, as the markets tried to react to the turbulence of 2022, the high-flying technology sector got impacted significantly. As a result, valuations contracted. With that, there was a correlated decline across M&A, IPO and private capital placement. Although tech was impacted, we still saw M&A transactions getting done.

How will market turbulence impact the nature of dealmaking this year?

A lot of companies are waiting and biding their time. What we are seeing is people trying to get creative. If there have been some PE-backed companies that have been in the portfolio for five or six years, still good businesses, we’re hearing from some of our PE clients that they might not necessarily want to run a full process. They might want to talk to a handful of folks who maybe have a good understanding of that particular business or sectors they are playing in, have a very good thesis around the opportunity, or maybe those folks have a portfolio company that you can combine with to create synergies. In some instances, maybe they want to sell half and keep half to realize their return later on.

What about the buy side?

On the buy side for new platform situations, I think we will see more activity this year. I say that because we saw some public company LBOs happen last year. There were some bigger ones that happened, including Citrix being sold to Vista and Evergreen Coast Capital in September, the December announcement that Thoma Bravo is buying Coupa in a take-private deal and the January announcement that Vista is acquiring Duck Creek. As stock prices have settled and may not rebound quickly, maybe finding a strategic or private buyer might be a better option than remaining public.

Everyone will sit there and say, “Well the cost of debt is so high with rising interest rates, it’s hard to get enough leverage or a large enough quantum,” but there are still people deploying capital. The private lenders are still active. A lot of those folks are leaning in and finding opportunities to support buyouts.

Which tech subsectors are you most interested in?

One of the sectors I expect to see M&A activity is cybersecurity. Whether it’s protecting everything we are doing online, anti-fraud or securing critical infrastructure, cybersecurity solutions have become crucial parts of everyday life.

AI, DevOps, customer engagement, digital transformation, risk and compliance and cybersecurity will be the major tech areas of focus for M&A and investment. During and post-pandemic, many process operations went through a digital transformation. So any kind of software that helps accelerate processes and digitizes what was manually intensive or people-based continues to remain ripe for investment in the hybrid world.

What about AI interests you?

There’s a lot of buzz in the market with Microsoft’s investments in OpenAI with ChatGPT. It’s really interesting, AI has been around for a bit. I think we are going to continue to see efforts both in investing and M&A around AI. Companies are also trying to find AI and ML solutions that help their business units.

What specific value does AI bring to a potential investment?

The important element is access to data and the ability to better inform and automate marketing, sales, and customer support decisions.

The question becomes, how do you ultimately win a customer, and even when you do win that customer, how do you support that customer and retain them? Having all of that connected and ensuring that there’s a positive customer experience and loyalty is going to be critical. So, technologies that help enable that are going to be important.