Cloudex Clearview Q2 2018Download PDF
The global cloud computing market is valued at $180bn (£136bn) according to Synergy Research and is still growing at 24% annually. As cloud increasingly dominates all elements of the technology market we look at the key trends driving growth and M&A in the sector.
UK private equity interest
In Q2 2018, there were 18 investments in cloud assets by private equity firms, an increase on the same period last year when there were 14. There were 9 growth capital deals, 4 management buyouts and 5 assets that changed their private equity investor. This takes the total number of private equity investments in cloud assets for the year to 27.
A general trend in the cloud market has been vertically focused software growing faster than horizontal software and this was reflected in M&A with 13 deals in vertical software by private equity investors. The notable exception to this was TA Associates and Hg Capital’s investment in Access Technology Group, which values the company at an impressive enterprise value of £1bn. Access is one of the biggest success stories in UK technology and has undergone a significant buy and build strategy, making 19 acquisitions in total. It now has a portfolio of solutions spanning a number of sectors including hospitality, education and not for profit.
Clearwater Cloudex Counter
The Clearwater Cloudex Counter monitors the change in the market capitalisation of our Cloudex index against the NASDAQ Composite Index and the FTSE techMARK index over the past four years.
Since the start of 2018, the gap between cloud companies and the NASDAQ composite index significantly widened, with cloud companies outperforming their on premise counterparts. There have been a number of reasons for this.
Firstly cloud companies have increasingly proven that their impressive growth rates are sustainable and not unrealistic as their previous critics have suggested. Shopify for instance has a five year average annual growth rate in sales of 95%. This has helped fuel investor confidence in the market.
Secondly cloud companies have also become significantly more successful at not only gaining users but embedding their existing customer base, through sophisticated application programming interfaces. Cloud companies have proven to their critics that they can create models with large customer retention rates due to high switching costs.
Last year saw the second lowest number of IPOs since 2009, with many firms turning to private equity funding rather than the public markets. Yet with ten IPOs in Q2 2018, it suggests that this trend may be changing. Spotify’s IPO was possibly the most high profile, partially because of its well publicised direct listing route. As a result roughly 90% of its shares were immediately available for trade, with the price of its shares set by both buyers and sellers, without using underwriting and stabilisation services. Yet with its shares receiving a mixed reception on the stock market, it remains to be seen if investors will retain confidence in the ability to successfully monetise music streaming services.
Storage software also dominated the list of public market entrants, with Docusign, Dropbox and Zuora all making successful debuts. Dropbox shares rose 35% on its first day of trading, with both Docusign and Zuora rising by 10% compared to their opening price. A combination of impressive post IPO earnings reports and some high profile M&A transactions within the sector, such as Microsoft’s purchase of GitHub, have also helped drive share prices up.