Megabuyte CEOBarometer Podcast: Q2 2025

Hi and welcome to the Q2 edition of the Megabyte CEO Barometer Podcast. If you're a regular listener, you would have noticed that we've made a few changes. The podcast will now be released quarterly instead of monthly as it was previously, and the episodes are going to be a little bit longer, and I'm also very pleased to say that I'm joined by a co-host.

Neil Arampata is Megabytes Head of Research and Consulting, and he's going to join me moving forward and he's going to be bringing insights primarily around ICT and digital services, but also obviously supporting me with talking about the broader themes in the industry. And I'm gonna focus a bit more on the uh trends within software and digital platforms, but again, uh focusing or or or also talking about uh what's going on in the broader sector.

The new format gives us a a an opportunity really to step back from some of the data and look at some of the key trends and take a more strategic view of those trends, whether it's MA, capital markets, broader macroeconomic picture.

But for those of you who are familiar with the show, it will follow the same broad pattern as it did previously. And we're going to cover the five areas that the same five areas that I used to cover when I was doing it on my own as a monthly, those being growth and trading trends.

capital markets, private equity, venture capital, and MA. And for each of those, we'll bring the key data points as we did previously, talk about some of the key news items that we think are interesting, discuss what's driving the key trends within those areas.

And then ideally try and help listeners to understand what that means for their business if you're running a tech business or if you're a you know, if you're part of the management team of a tech business, try and help you to unpick business problems based on what's going on in the market.

So let's get into it. First we're gonna start with uh trading and growth trends. I'm just gonna unpick some of the data to start with before I ask Neil to think about what we what some of that might mean for the ICT services sector. Those of you who know the megabyte service know that we track organic growth rates across what is it now, seventeen hundred companies? Eighteen hundred companies. This is all the companies in the UK in our world of B2B software, IT and telecom services that

Uh publish full accounts. We we calculate the organic growth uh numbers for all of those. Most of those are private companies. So it's a bit of a rearview mirror. But with that in mind, the numbers that were reported in the March quarter were thirteen percent growth for software companies.

Seven percent growth for I C T services companies and bang in the middle, as you'd expect, ten percent for overall. And that is organic growth as reported in the March quarter in Q one. So that's largely relating to calendar twenty twenty three.

Or maybe uh people who reported results from later on, maybe Q one twenty twenty four or reported results. Not reported results, sorry, had a year end in Q one or Q two probably. Um so it's a it's about a year lag, nine month to a twelve month lag, but it does give us an idea of the trend. The trends are very clear. We had a peak of growth in in in the post COVID period where we had twenty percent growth uh for software companies, seventeen

percent growth for ICT services companies and eighteen percent growth overall. That was the max we hit during that period. And that was um a really quite extraordinary period. And we've seen a a a gradual downward trend over the last few quarters. I guess what's interesting to get into the detail of it is

What do we think are the drivers behind these growth changes over the last quarter? And I guess importantly, what uh what we think might happen over the next 12 months or so. So we'll get into that. And as we go through that, we're going to talk a little bit about A couple of things I think that we think are particularly significant for this for companies that we track at megabyte. One is

public sector because it's a really important and there's a lot going on with that so we can try and unpack all of that. And the other one is we can't not talk about tariffs. Uh those of you subscribe to our service will have seen um some excellent coverage of well actually both of those. things yeah more recently in our in our in our service. So we'll we'll we'll touch on that. But maybe to start off, maybe dive a little bit into the ICT services side of things.

What are you seeing in terms of some of the growth trends, maybe some of the results that you've seen over the last few months that really highlight what's happening with growth in I C T? So I think what's been particularly interesting from an ICT perspective is if you look at the results and the accounts that we're coming through that are coming through at the moment.

You look at the numbers that they're actually reflecting, as you said, it's kind of your d year to December twenty three, year to March twenty four, which might seem like ancient history. But what it is showing is very interestingly for us. what that year ended up being, which is as we expected, a very poor year, particularly across IT ICT services.

Uh, we saw that post COVID boom in digital transformation spend, that started to completely turn the other way uh very quickly, primarily just because of business confidence, macroeconomic trends, interest rate environment changes through twenty twenty two as well. All of that drove uncertainty, which has a big impact on I C T services. So

And those numbers that you're seeing in FY twenty three are a reflection of that. I think what's really interesting for I C T services companies, particularly IT consulting, so one of the areas for for those who don't know our taxonomy

one of the areas of I C T services is IT consulting, which is your consultancy businesses, your systems integrators, lots of very project driven organizations. When that money and the discretionary spend that fuels those businesses when that slows down or when that stops.

it comes through very quickly into the numbers. There's no recurring revenue. There's no recurring revenue. Or very limited recurring revenue. Yeah. And and you you know you'll have organizations that do multi year projects and things like that, but how they recognise revenue is still dependent on how those companies want to spend.

And customers can still pause projects halfway through or they can cancel projects that have already been agreed if they haven't started. So that has a big impact on kind of overall growth growth numbers. So what you see here in the ICT services number. I would say is a big a big component that of that is the slowdown and then kind of in some cases big declines in in IT consultancies. Our colleague James, who leads the coverage of IT consulting.

He uh he talks about, you know, double digits and strong twenty percent growth being the kind of norm almost through COVID. And then that kind of flipped almost the other way now, um, where kind of if you're flat

It's kind of that's the right thing. You're doing the right you're doing all right. And there are a few companies in there, I mean vanishingly few really that are still growing at a reasonable clip. Yes. And they're exposed to, I guess, certain areas in the market um that are still growing, whether it's a technology Technology area, Microsoft's still quite strong, I guess.

for the most part, it's a challenge. I think so. And and I think it's it's not just I I d I don't want to I don't wanna sit here and just bash the consultancies because, you know, even uh managed service businesses, which I have historically covered larger recurring revenue bases, but they still have professional services in their mix. And when that starts to turn off or or starts to suffer that appearance.

impacts the whole business. So I think some of the stats that I've got here in terms of FY twenty three, uh, we were expecting that to be kind of a six to eight percent organic growth year. I mean the numbers do reflect that across I C T services. Um, what we then expected was twenty twenty four to maybe show some improvement. Maybe we thought FY twenty three was the last of it and then twenty twenty four would be better.

Uh, it wasn't like that. I mean, fundamentally if you look at the trading up and all the way up until the summer. It was particularly bad and the summer was almost tumbleweed. There was some positivity post summer, September in particular. I think the conversations that we were having as a team with management teams starting to improve. Uh maybe maybe the pipelines uh will start to come back in the in Q four.

drive revenue in 2025. And then the budget happened. Uh and I think from that perspective, everyone went back to the drawing board. That affected sentiment again. So and really we're now starting the conversations we're having with management teams now.

very clearly highlight that FY twenty four did not go the way we expected it to is it do you think so when we look at the growth rate so we I just talked a second ago about seven percent as an average for what we think is broadly let's just say it's calendar twenty three

So what is your expectation then for when we're uh sitting here in a year's time and thinking about growth for FY twenty four? What do you expect that to be similar level? Similar. I think it's gonna be about maybe six to eight percent. I mean some areas as you've already highlighted, some areas will be doing better and we can talk about maybe some of the areas we're we're excited by.

Okay. Um but I think overall for the market it is going to be about another six to eight percent um organic growth year. Which is disappointing after, you know, what was an amazing post COVID period. But there are so many factors involved in in kind of driving that. I think particularly for us

that highlights, you know, why this idea of recurring revenue, the idea of predictability, the business models that actually provide some stability. That's why there's so much flight towards those business models at the moment.

And there was so funny. It's so funny that'cause'cause it was so it wasn't that long ago where it was on the flight towards the professional services. Everyone's realised recurring revenue is better than is is really where they want to be after all. Yeah, exactly. And it's it's kind of it's'cause we talk about organic growth quite a lot a megabyte.

But actually there's a lot of conversation now about the sources of that organic growth. Because professional services was driving very strong organic. It can be very high margin, particularly if you're high utilisation rate. Absolutely. But I think fundamentally it's about the quality of that organic growth as well. Where is it coming from? Doesn't mean professional services is bad, but if you're let's say you're an MSP

that does some professional services, a good chunk of managed service and even a bit of resale. It's how do those things work together to drive recurring revenue. So you do need some professional services to, I don't know, move someone onto the cloud. Um, you need a bit of professional services to drive that, but then you've got the managed services on the back of it where people have fallen out of love with. It's just

pure professional services for the sake of professional services. I think that's that's interesting. And I think from the software side, I mean, um we can maybe dive into some of the specifics in a minute, but just to talk about the broad trends again. It's much harder. I mean, ICT services is much more homogenous, even though it's obviously quite broad as well. Software is much more dependent on the end market, clearly. Well, you've got end markets.

for the verticals and then areas such as HCM and financial accounting software and so on for the the horizontals if you like. I think one of the stats that really struck me in the in the quarterly barometer reports that we do uh one for software, one for I C T services and we publish those

Last week. Yes. I'm gonna say last week. Was that o of uh seventy four percent of software companies that reported in Q one showed a deceleration in organic growth and eighty eight percent showed lower E bit DAR margins. Now again this we make the point again about rearview mirror, but I thought that was really super interesting.

And, you know, you know you think about the growth rates. I'll talk I'll drill into healthcare in a minute'cause I think it's kind of interesting in the public sector lens. But we're still seeing overall decent double digit growth. And what I thought was interesting, sorry to jumping around a bit here, but The growth rates I talked about software being thirteen percent again, broadly speaking, calendar twenty twenty three.

was broadly interestingly where it was just before COVID, whereas actually I CT services is quite a lot lower than it was just before COVID. They were software and ICT services were running very similar levels just before COVID.

So I think that's significant and that's a theme I think we're gonna talk about quite a lot over the next however long we're here, forty five, fifty minutes, because that feeds into confidence, it feeds into evaluations, it feeds into M and A, which I think is is kinda quite critical. But in terms of software.

It it is partly down to drive what's driving that, it is partly down to end market. We generally see FinTech as growing faster and I think it it is generally the faster area growing within so the fastest growing area within software. struggle to make a profit because of the other point. But but terms of growth, it's definitely there. HCM, human capital management's generally pretty strong as well. Cyber's always a good a good area of the market.

But I think the we'll talk about public companies in a bit, but I think that uh as some people know, I'm a board member, I'm a non exec director at Cortex, which is a telematic software business. And I think it's quite representative in some ways, Cortics, of the s the typical software company now. It i we are the board is we're growing I think the company we did a trading update a couple of weeks ago is back in double digit growth after a uh a tricky period previously.

And we consider that to be doing quite well. And we're working hard for that double digit growth. This is, you know and I think the company's achieving software companies achieving twenty percent growth now. And there are still quite a few of them in mainly in PE w PE land.

are doing exceptionally well. So if you're out there listening to the show and you're running a software company growing at twenty plus percent at some scale, um, pat on the back. Yeah. Hat tip. I think if you're running a c software company and you're growing in double digits, you're probably near the average and you're doing well. But there are still a lot of software companies out there.

Not growing much. I think the big difference really between software and ICT services at the moment, we chatted about this before, is that there are very few software companies declining. You've got that recurring revenue. A bit in the way is probably not many I IT managed services companies decline. That's true. Because you've got that rent role, you've got that recurring revenue. Uh again, we're not missing to bit bash the the professional services companies, but I think that's the main delta.

I mean you've also got telcoservices, which is historically a lower growth part of the market as well. But the main Delta I think at the moment and the reason that The main reason that that software is back to where it was growth pre COVID and ICT services isn't is because of professional services. Yes, and I agree. And there's there's some particular examples that I can bring out which which

w it's all it's all published on Megabyte platform so you can go read our notes in these companies uh in more detail if you're interested. But you know, for example you've got the likes of uh Node for and B C N Group, both companies that we've been covering for a very long time, both very well known names in the

in the space. Both of them have highlighted, you know, they've both released results relatively recently, you know, um, particularly for note four, you know, organic growth of more like four percent, um, uh according to the latest numbers. But within that you've got the core original node for business that everyone knows it for, which is managed services and the data center services. That's going at a similar clip to what it's always done. Stable, good growth. Um

But then you've got the professional services which they've invested in through acquisition quite his quite aggressively in the past. That's the bit that's taken a bit of a bit of a bit of a knock. Bit of a knock, quite a knock, um, over the over the last year or so. Uh and BCN may be less extreme in in in both senses, but it's core managed service business, which we it's always been known for.

Still doing well, still doing double digit growth uh according to the management team. But then their professional services bit, that's the bit that's kind of, you know, holding them back. And fundamentally if you're looking at them as an overall business, the numbers are probably not where they would like them to be, but it's primarily down to the professional services bit rather than the managed services bit. Which uh which which I think

Yeah, those are big companies in the space. We talk to them quite a lot. Um, you know, even for smaller organizations that maybe are less broad in their capabilities, if they still look at their managed service business and they look at their professional service business.

They'll probably see similar similar concerns. So it's yeah, it's interesting. It's not it's not just the professional services businesses that James Priest, our colleagues covered. Yes. It's it's across the Yes. It's that type of Business model. Um I think that's that's the impact.

And I think you you mentioned certain certain areas that are doing, you know, and some companies are still doing well. So I do want to highlight in all of this PS bashing. You know, there are organizations that are doing doing really well, maybe because they're in the right area. So you've got organizations like digital, but Digitul. Digit two L, yeah. Did Digit L but they're in the defense space.

doing unbelievably well. Yeah. Really, really strong. It's probably not the right thing said by being in the defence space, but you know what I mean. Yeah, yeah. Fundamentally they are they are, you know, benefiting from the spend and the increasing spend that's been going into the sector. But also they're doing something right within that space as well. It's not just saying be in defense and you will do well. Um, but they've got the right right set of uh capabilities within that.

You've got organisations in cyberspace like Bridewell which is primarily a consulting business. We'll talk about them later as well when it comes to transactions. Yep. But yeah, their organic growth and their profitability is very strong because they've done something, you know, they've done all of the right things in the right space and they're in the right areas. Um and as a result they're generating twenty percent plus plus organic growth and um there are loads of other

Consultancies. Doing super well. Yeah. Um mix of Microsoft and Cyber basically. Yes. Two to both. Relatively strong areas. But then there are plenty of Microsoft businesses not growing well. So fair play to FSP, you know, is not just about the market, it's about execution as well. So I think probably our point here in all of this is that it is absolutely possible to still deliver fantastic.

uh growth, profitability, cash generation. But the market's not with you uh in this situation. So it's gotta be down to work for every every every every dollar.

So before we run go on to the next section we're going to talk about capital markets, we need to sort of just think about the outlook. So what what do we think for twenty twenty five then in terms of ICT services, what are we thinking about growth rates for the next twelve months?

So I would say that if we if we're saying that uh F O twenty four is kinda six to eight percent, we were expecting actually uh maybe a significant improvement in twenty twenty five, maybe even ten to twelve percent uh on average across the s aro across the sector.

Um, given what's going on with the global economy, macroeconomic uncertainty uh will come onto the tariffs and kind of second order impacts, I think we're cutting our guidance from that perspective. I think we're still expecting it to be eight to ten percent on average. So it is an improvement on FY twenty four. But again, there's gonna be real what's the right word? Real v uh v variances within that. Yeah, yeah, yeah. Um and some will do well. I think generally

The people that will benefit in this current in this year in particular are those with a broad range of capabilities. They can answer a lot of different customer questions. Um, and have maybe that's because of acquisitions they've done in the past. They've got all these various capabilities that they can bring to bear.

But also I think fundamentally the market is gearing towards organizations that focus on existing customers. So new logo it always has to be a thing. But I think if I if I think about all the companies I talk to where they're putting all of their focus is into existing customers. So new services into existing customers, improving customer experience.

Um, whether that's through IP or whether that's just customer service. They're doing all of these things to make sure renewals go as they need to do and they get the price where they need to.

And then they're able to cross sell new services into existing. Cross sell. We love about cross sell. We love cross selling. I think within software, y you know, I think it's it's quite a different it's quite a different thing. I mean, as I s as I said a couple of times now, average growth rates are thirteen percent, broadly what they were pre COVID. I think we will see as we go through the the this year in terms of reported numbers for last year, if that makes sense.

I think we are gonna s continue to see some decline. I I I whether that ends up being um end up averaging at high single digits or might bottom out at very low double digits, ten percentage, I don't know. And I think that there are

there are good reasons why that should stab they should stabilize at that point. Mainly because of the recurring revenue nature of software and the mission critical nature of software. Not that IT managed services and other recurring revenue elements of IT ma I C T services aren't mission critical, but there's probably more there's probably more pricing power in software that enables them to move more with inflation.

Um so I expect that to I expect to see that and but I don't expect I think neither of us expecting to see the V that we saw post COVID. You know, we saw a a really strong recovery back up to twenty percent. I don't think either of us expecting anywhere near that. Um and we've got and we won't spend a lot of time on this because we we we need to push on. We'll touch on tariffs, but you know, uh we've got macro headwinds, uh we've got we've got an economy that's

barely growing. Uh we've got tariffs we'll talk about in a sec, which are affecting sentiment at the very least and maybe other things. So I think that we haven't however talked about AI. We've been what have been twenty minutes into a tech podcast. So we haven't talked about AI. Happy days. And we're not gonna talk a lot about AI on this on this version, on this

Um on this episode anyway. But it will start, I think, to move the needle on growth um as we move, certainly towards the s into the second half of the decade, but let's not go into that now.

Tariffs. Let's just touch on tariffs before we move on. I mean I'll t I mean I think the the the the broad the broad theme here is and and again we've done quite a lot of work on this or the team has done quite a lot of work on this at megabyte on the platform but It is first order effects relatively small. Uh there are some direct impacts with people that have hardware in their some hardware in their mix, you know, telematics.

uh some of the retail Epos um um stuff from a software perspective. Networking equipment, which will be first order impacts, but we're not seeing those as being huge. And it's really about second order impacts being, you know, where are the industries that you're serving as a tech company, whether it's software or ICT services.

Going to be impacted by tariffs. I don't know. You got further thoughts on that? Yeah, I think so. I think the second order, particularly for ICT services, I've talked we've talked to a lot of companies across the space, both myself. Myself on IT services, James on IT consulting, Philip um on on telecoms. Telecoms slightly differently, it's much more of a domestic market. Even IT services and IT consulting is generally domestic markets. Um fundamentally

our universe that we cover isn't hugely international. Mostly UK and if they are non UK it's probably going to Europe. So the US is a different matter. But those people that are thinking about, you know, uh if you're selling into the US, are you selling into a US customer with US staff based out of the US, you're gonna be fine. That's not really the the main impacts. Second order though, this is where a lot of my companies are spending a lot of time and a lot of homework on their end customers.

primarily because as I've mentioned before, all of this is driven by discretionary spending. And discretionary spending is driven by business confidence. Obviously there's a need and a budget, but then if you're not confident about what's going on, you're not going to be spending the money.

And we've seen this in lots of different ways and lots of different podcasts will probably cover lots of different areas, but for us those organizations that are looking at their customers and going, Am I really exposed to travel. Am I exposed to lots of manufacturers and are those manufacturers selling into the US? Uh there's one company I'm talking that I that I spoke to where one of their biggest customers is a uh manufacturer of precision measurement gauges.

Uh, which sounds very niche, sounds very cool. They sell kind of seventy percent into the US. So those measurement gauges, that's n that's now going to affect their sentiment, their spending. I think there was a there was a hope to to run a kind of quite a large um Dynamics three six five implementation project. Where is that gonna go?

I I I don't expect I mean the public companies for example, profit warnings based on tariffs. No. This is a this is a general eating away at what was already quite a difficult growth environment. I think. Some companies will have specific issues, but I think what we're saying we need to move on. But I think one of the one I my sense is that it's going to be just another drag. Yeah. Or hampering the recovery. Yeah. Yeah. Hampering the recovery. Yeah. Um that that feels like

So I think I think in terms of growth outlook, we are very modestly optimistic, I think, but that Tariff is not helping. And I think that, you know, um I think twenty twenty five is gonna be another Another another challenging year if we're honest with ourselves, which is which is not what I want to be saying, but I think that's that's the reality of it. Yeah. Okay. That's it on growth. Let's move on to capital markets.

Okay, so moving on to capital markets, I think that um I'll do what I did in the previous section. We'll talk through some of the stats. Before I dive into that though, um just wanted to make a couple of broader points about Corporate activity generally. And the headline very much is Q one was a very quiet. I mean, across the board. Surprisingly quiet across the board, I think.

And that is highlighted by a thirty two percent reduction in uh overall deal numbers across the sector in all the categories we track, uh, two two hundred and thirty two. So running at an hour a at a run rate of below a thousand for the year is very low.

I always have to caveat these numbers by saying that we tend to add deals later. So that they tend to be revised upwards later. Yeah. So the year on year reduction is probably not as great as thirty two percent when all said and done. But it's still it was still and everyone's talking about this in the industry.

Very quiet quarter. And we we talk to a lot of investors and advisors and they're they're they are a real time indicator of deal activity and that it's quiet. Yeah, it's just quiet. And and why? Well, I mean you don't need to be a rocket scientist, I don't I don't think for that.

Trading can diffic we just talked about the growth environment is still um between benign to challenging. Yeah. Very few people say, Yay, at the moment, macroeconomic economic uncertainty, as you said in some of your opening remarks, um, has been higher over the last six to nine months than we thought it was going to be. Access to capital. Not so much equity capital, but more debt capital. Um not so much access, but cost of probably is a better way of looking at it.

And you we were talking about this earlier, um, availability of targets when we talk about MA. So there's lots of headwinds at the moment and not many tailwinds. And probably add into that. particularly on an MA front, but also slightly private equity, that a number of deals were brought forward by the budget. I mean, you know, we talk about our um C D practice where we're doing typically helping companies with diligencing their MA targets.

We were rushed off our feet. I mean, absolutely crazy around September, October, November. And we've been busy since, but you definitely know some of those deals have pulled forward. So that's the backdrop to capital, uh sorry, to corporate activity. Diving into capital markets.

Just starting off a little bit, talk about some of the share prices and You don't need probably me to tell you that uh it's been a tricky m a tricky period for uh for share prices. Overall, the megabyte universe. I've got into the habit of saying a hundred and fifty UK listed tech stocks, but I looked it the other day. It's actually more like a hundred. Oh god. Uh because there's been so many coming off the market.

Between a hundred and hundred and fifty UK listed tech stocks, they were down four percent on average um in the first calendar quarter, and the average valuation is below ten times uh for the first time. Well, it's been bumping around that, but it's

surprising that it's below ten times, nine point seven times down six percent. Software share prices and I C T were both down about three or four percent, so no big difference there. E V Bidarian software down also six percent to ten point four times. Down again in ICT services six percent to eight times. So mm the businesses that we were talking about, we'll talk about in a sec, on average trading at eight times, which is, you know, lower than it's been for a long, old while.

A few share price performances, Sage down six percent. What's interesting about the software index we run now is how few actual software companies are in it. because it's software and digital platforms. Oh a lot of the businesses there are very few software companies, B2B software companies of scale now. It's we we included it things like WISE in payments.

global data in kind of digital research business a bit like ours. Right move is included in there. So like the platform. Delivery for now. Um so th you know, that that that's an interesting dynamic as well. I mean on s on services, you know, what have we seen there in terms of share prices? I mean I suppose the dynamic which I was going to ask you about that I think we we chatted about before is interesting is

Resellers doing quite well. Everyone else not doing so well. Do you wanna just chat about that? Yeah, I think I think it's really interesting. The resellers have always been a confounding kind of element for us because You you you talk to private equity and you talk to them about resellers and this

almost no interest whatsoever just because it's transactional, it's very lit if you think consulting is bad from a from a predictability point of view, tr you know, resellers are are even more so at their fundamental level. But the three kind of really core listed businesses that you've got are some of the best in in in the UK in the business. So you've and and reselling, as we've always said.

is a scale game. Get big, get niche or get out. Yep. Um and the ones that have decided to get big, uh SoftCat, Bytes, Computer Centre are the listed ones. They continue to hoover up market share.

even though they all say they've only got a five percent market share or ten percent market share. I think it's more than that. But fundamentally they are they're significant elements of the ecosystem. They've got scale on their side and they've delivered great share, you know, since SoftCat has listed in twenty fifteen. Uh it's delivered fantastic shelled returns, so it it gets an outsized valuation and its share price performance reflects.

The fact that it keeps getting through all of the bad times, you know, generally overscathed. Gener relatively unscathed. Um but then if you look at uh if you look at some of the consultancies, um back to what we were saying a minute ago. Yeah, trading, even kind of sort of almost previously bulletproof names like Kanos, etcetera

They you know, they have had a tough time over the last couple of years. It sounds like they hit writing the ship now, but they've had to do a seven percent Yeah, in Dava stock, which we don't talk about a lot because although it's a UK headquartered company, it's listed in the US and it's got international operations, their shares were down thirty six percent if you want.

I don't know what happened there actually. It was a pro tra trading update. Yes, it was a trading update. Um so I think it's a really it's a really tough time. But fundamentally in I C T services There also just aren't that many companies. I mean if I look at IT serv proper IT services organizations that are listed.

That's a grand total of less than ten. Yeah. Um so how do you really make Yeah, and I think this is the problem as well when we talk about valuations. It's like the eight times number, is that really helpful number? I know we'll talk more about uh M and A valuations and P valuations in a minute. But But for now anyway we're seeing the the the resellers Uh outperforming. Uh we'll be interesting to chat about that next quarter.

Um just on the on the US co sorry, UK context, FTSE two fifty was up three percent. So actually the overall market I like the two hundred fifty'cause it's a very UK centric one rather than the FTSE one hundred, which is all oil producers and wine companies and and and international banks. is a good is a good indicator for the UK. So the tech sector underperforming unsurprisingly given the toughness of the market.

In the US, the Nasdaq again, massive drag. I mean volatility as you you would have seen everyone would have seen. Massive volatility, but overall for the quarter was down two percent. EVDAR of the Nasdaq down five percent to eighteen point five. The B VP Cloud Index, this is this index of pro primarily SaaS stocks, high growth SaaS stocks, that was down fourteen percent again.

High volatility, times of high volatility, you'll see that outperforming or underperforming the market. And that was certainly the case. Still trading on seven, just over seven times EV sales as an average. So the US SaaS stock's trading. That's actually it's been as low as five, I think. So it's it's still reasonably resilient. And and you know, there's been a whole mix of uh a whole mix of share price performances. I won't go into all of those, but fundamentally I think some of the more stable

slightly more boring companies are performing better from a share price perspective. So, you know, Fortinet up two percent, for example. IBM was up thirteen percent, Cisco up four percent. So some of the venerable names. Whereas the likes of Salesforce was down nineteen percent, MongoDB down twenty eight percent. So again it's that volatility. So Accenture down eleven percent, Accenture down eleven percent, yeah, professional services, etcetera.

So I think I think it's been a tough quarter. I mean, and that's that's really down to what the Donald is doing, uh with the t with the tariffs. Take your view on that. We're not gonna get into the detail of what whether that's good or a bad thing. In terms of corporate activity.

No more IPOs. No um and uh that's still the case. Some some follow on public offerings, seven actually uh compared to four in the first quarter of twenty twenty four and forty million raised, lots of tiny ones. Again, the only one of any note was Pinewood, which is this is the software spin out from studios.

That happened, I think, last year. Right. Uh and they raised thirty five million for acquisition. So there is but I mean you compare that to what's going on elsewhere in the market. It's just tiny amounts of money being raised. If I talk to any of my yeah, private c maybe we'll come on to IPOs but y you talk about IPOs being zero.

I think we can we can look at a few steps before the you get to IP and you just go, What are your liquidity options? What are your you know, what's your appetite for doing the various types? Do you want to sell to trade? Do you want to do product? Do you want to take great capital?

Do you even wonder I we have more companies that are more interested in going into employee ownership than they are into IPOing and that uh that sentiment, even if we only get one element of that picture, yeah, that sentiment pervades through the market. But there is a but for the first time. So so the but there and it's a it's I don't think it's a huge but, to be honest. Um I think that there are a couple of things worth talking about. One is back to the point we were saying about resellers.

And and possibly also professional services, IT consulting businesses. You know, there is such a trailblazed by SoftCat and then well, I suppose Computer Centre a long time ago, but then SoftCat and then Byte. Um, if there are resellers at scale, not mentioning any names, you know, they might that might be an interesting thing for them to think about.

I do wonder uh whether some of the IT consulting businesses, you know, there's a reason why the likes of FDM and Kenos are on the market,'cause it wasn't that long ago that private equity were really not interested in businesses that didn't have any recurring or limited recurring revenue in them.

contractually recurring, you need to need to say that'cause a lot of these businesses would say they have got reoccurring revenue. Yes. Uh and it might be that that tr switches things round a little bit and actually we do see some of those finding a home in the public markets. I'm not I wouldn't overstate that, to be honest. I mean you made the point earlier that actually it's It's just easier for P to exit to trade if they don't want to exit to another P.

I mean that's one example you mentioned there about the IPOs, you know, there was one organisation that we had really, really expected to be a real IPO candidate, which was um CCS Media. So you've got in terms of the list of UK resellers, you've got your softcat and your bike.

And then actually the next biggest one from from our perspective and next most interesting IPO candidate was C C S Media. And I had nine thousand S M B customers, kind of a clear soft cat kind of looking like yeah, a few years ago.

And they were quite by trade. And uh fundamentally clearly the management team there didn't want to take it to that uh IPO level. And if I look at some of these some of these organizations, they might be good IPO candidates just the appetite just doesn't feel like it's there and maybe if prior equity is a less compelling proposition

They might look at IPOs, but I think that's a push factor. What we need is to see some sort of pull factor from the capital markets as well, which might be a regulator. Yeah, and then I mean we'll get into that whole thing, but there's potential regulation and so on, but you know, uh that might help. I think for me one of the biggest things though from a positive perspective for the London market is not a very important thing to do.

is some of the m more high profile IPO. So the context is the class example, which I think is widely rumored to be winding up for an IPO at some point maybe next year. I'm not quite sure. Um and you know, contexts are for those listeners who don't who don't know what it's you know, it's I think one of the most exciting software companies in the UK.

It's a it's a data AI uh business originally focused around KYC uh banking application for automating that process, which anyone in the banking industry will know is hideously long and boring and also uh very costly for the banks. Very successful. It's over a hundred million of ARR now. Um, and they've been uh just raised money. We'll talk about that in the V C section at I think a two billion sterling valuation. So it'll be a an it'd be a punchy proper IPO when it comes.

Yeah, if I were their board on their board with uh and I'm pretty sure they would be weighing up whether London or New York is the right option, I would say probably before the tra the tariff malarkey, I would say that um New York would have been the most likely destination. I would probably say that's now flipped to London. Really? So some of these higher profile

um digital VC backed businesses where IPO is a more established route, um, may find their way to London whereas they might have been. So I think that is a possible positive for the London market. Okay. Quantex would be a fabulous company to have on the London market. So I think um more we could talk about with IPOs, but um you know, as ever, lots to get through on the show. So let's let's let's move on and we're gonna talk next about what's going on in the world of private equity.

So diving in, uh uh talk about the stats again, talking about private equity. So I'll just run through those quickly and then we can get into some of the details. And we wanna talk about some of the transactions, though I'm not sure we're gonna have that much time to talk about too many actually, but uh we wanna talk about debt. We want to talk about private equity debt and and and and and unpick some of the things going on with that.

Just quickly looking at the numbers, it was a quiet quarter. And we talked about this a few times. So the number of PE deals announced uh and added to our database in Q one, calendar Q one was sixteen. That was uh more than Uh less than half, sorry, down more than fifty percent on the same period last year with thirty eight. Ten software deals, just six private equity deals in the whole quarter. In I C T services. In I C T services. That's quite a thing. MBOs nine.

Uh down from seventeen, same period last year. Secondary buyout, seven down from sixteen, no public to privates compared to none last year, and no carve outs. Interesting compared to five this time last year. So carve out run such as it was seems to have come to an end a little bit. come to an end to some degree. Um And uh you know, I think you know, what what's driving this, it's all the things we've been talking about, isn't it? You know, it's uncertainty with budgets.

Yeah. Before the tariff thing. I don't think I actually don't know you might disagree, but I don't think the tariff thing has been a specific reason why it's been quiet this quarter or last quarter. I think that's something that's going to affect things going forward potentially. Yeah. I think it's been um all the things we talked about before, which is

uh when I was talking about the overview of corporate activity trends, trading primarily, I think, isn't it? It's really around uncertainty around budgets, the debt aspect of it. That's less of an issue in P than I think it is in in M and A and and and cautious. But I must admit I've been surprised. I think people have been surprised at how quiet it is. Do you sense that? It's um the product guys that I speak to, it's been really interesting because they complain there's not enough.

There's not enough there's d there aren't enough assets. Um sorry, I know we don't say assets for companies. Yeah, there just aren't enough companies at the right le uh there's the right size level. You know, there's lots of lots of companies that want maybe a million of E bit DA but really if you're trying to realistically in services, maybe it's different in n in software, but in services

You really want them to get to about two or three, really three before before they're yeah of of eBidar. So just the number of of companies of that size that are available with an am appetite from the sell side to actually do a deal and do some liquidity. option, that's an element of it. Certainly in IT services, if we take if we look at the areas where there is recurring revenue models that product he likes, there are just very few companies in that size range at the moment.

They keep getting bought earlier on by some of the existing prior equity platforms. Although that's happening less. But the good ones are still being bought. It's probably the not so good ones that could probably never do private equity that are not getting bought.

stayed away from any sort of liquidity event for some reason and then finally they get to about three and then everyone's hounding them. I think there's just there's just also There's just it's the debt I think I know you'd said the debt thing isn't isn't a huge issue, but if we think about it from a valuation perspective, it does have'cause there was a time that and maybe, you know, vendors and and sellers of these businesses are sitting there going

I remember a time when people were paying mid teens multiples for businesses of my size or my quality and no one's offering me that anymore. So I'm just not gonna do a deal. Or there's just there's this buyer seller kind of We also haven't talked about capital gains tax. Yeah.

From twenty percent to twenty four percent and then on to twenty eight percent. I do wonder if people are thinking, well I've just gotta you know, if I'm gonna retire, which let's be honest, not PE some I maybe that's more M and A to be fair. But there are maybe on MBOs there are people wanting to retire and pass on to the next

the next generation of management. They're thinking, well actually I've got to I've got to r work for another year or two to get them my retirement fund. Um because the taxes are going up. So that I think that is a factor. That factor being what I just said, but also the fact the deals were brought forward. It's all kind of Yeah. Yeah. That makes sense. It's all it's all that I think it's also interesting to talk about valuation. So

We we we track all the valuations. A lot of the deals we do we the one of the unique things about the megabyte database is that we estimate deal values on private equity or on all deals where we feel we've got some where we've got some intel.

And uh that's particularly relevant for PE because as most of you will probably know, we don't they don't often tell us what these v deals are valid at. And it's the same it's a it's a it's this dynamic we've been talking a little bit about or a lot about over the last half an hour is

Software is generally quite robust. When I look at valuations in software They are on average in private equity twenty one times trailing. I think that's that was a surprise to me when I was reviewing the stats'cause I hadn't realised they were scoring. It's quite high. It is quite high and and on paper it's where it was in twenty one well, twenty two. I I don't think the peak is I think the the the the range is narrowed.

I think the I think the the height we we we used to say, didn't we, in twenty one, twenty two, thirty was the new twenty for software businesses. I don't think we're seeing anywhere near that top end. Right. But I think that the the overall I I do think software valuations are reasonably robust. Um and that is a trailing number, so you're probably thinking about, you know, average growth of fourteen percent or maybe higher in P E.

Fine. So you're still talking about high teens on average as a current year forward multiple? And what's driving that in software in particular? I can talk about ICT, but in software is it is it Business model, kind of earnings quality, is it growth? So growth is is is robust, reasonably robust and not dissimilar to what it was a

A few years ago. Um, you uh you know, again, I'm not bashing IT services companies, but by definition there is a lot more intellectual property in software companies, so they will have that higher valuation. And um and and so I think it's it's resilience, it's business model, it is the pricing power we talked about. Software typically is uh I think software companies have got more pricing leverage with their customers than maybe I C T services companies. So all of those things mean that

There is historically always been a this of course. I mean interestingly, the only time I think in the time we've been running megabyte, which is eighteen years now, say it in a hushed voice, um, that I C D services companies briefly got more expensive than software companies was during the hosting boom. About ten years ago about data centers.

And that's, you know, and we're ignoring the fact that we're very CapEx heavy. Um but but other than that, there's always a I do think that the the differential was so just to give you the stats, so ICT service is currently on eleven times, again on the same basis.

in uh trailing numbers. Uh that is six turns lower than it was at the peak, whereas software is not that dissimilar. Right. So you've seen a big pullback in ICT services valuations from a private equity perspective. And again, Again, we don't want to bash the professional services companies and we're not b but but it

Factually, yeah, you saw a lot of the very frothy deals getting done in twenty one, twenty two with in in IT IT consulting at punchy multiples. And that's right for PE as well sorry, MA as well with lights of Accenture snapping them up at big numbers. And I think well, I mean you talk about it because it's your area, but we we have seen some reduction in pr P evaluations in IT managed service intelligence. Oh, yeah, definitely. I mean we we but much less

significant I think than we have in professional services. Yeah, so that six turns is probably w more more aggressive in in professional services. I'd say I in IT services we talk about twelve being the new fifteen times so The the point here is that there used to be a time when people pay mid teens, so the big scale, high quality businesses, the premium businesses in the market.

They were going for mid teens. Um, and now with the current interest rate environment, the current trading environment. Um, you know, we say that the going going price for high quality business now is twelve to thirteen times. So just mathematically there's been a reduction in the valuation of the case. So I'm now gonna ask you to contradict yourself. And talk about Bridewell. So there's a problem

So so even within that you then look at yeah, you have a really throw me in it there. Um because fundamentally there's always the exception that proves the proves the rule and Bridewell, I think, you know, from from our perspective as we understand it, you know, uh a deal, a cybersecurity services business A big and critical national infrastructure. High consulting we're we're we're we're

Contradicting everything we've said. I hate Anthony'cause he breaks all of my rules. Um but fundamentally, uh, you know, Bridewell did a deal earlier this year, kind of a combo kind of uh investment with Oakley Capital. And and Euroseo two hundred and eighty mil our estimate is two hundred and eighty million pound valuation on that, which is on a, as we understand it, December twenty four EBITDAR of nine.

December twenty five E batar of twelve and a half. Right. So of whichever number you choose to use their trailing or not. It's a massive multiple. Um and I think there's elements here of you know it's It's in cyber, which always has a premium against it anyway, but it is a high quality, growing, scale and profitable cybersecurity business.

Yeah, there's gonna be elements there that are hype around the deal, hype around the business was was quite significant as well. Um, and so so it had all the right things in the right area at the right time, uh and had you know.

Anthony has built fantastic business. So it's it's there's definitely a scarcity value. Which is which is always a fa whatever whatever part of the market you're in, private equity capital markets, whatever, scarcity value is always gonna it's always gonna it's always gonna tell. Yeah, I mean I think that's a super interesting deal. And then look.

W it was a quiet quarter, definitely. We've talked about that, but actually there's a lot of interesting stuff going on nevertheless. I wanna just chat about the and it's I'll be c candid, it's not a business I'd was really familiar with um before researching. Doing my research for the for for this course's podcast is Napier. It's it's uh it's a software business in information management GRC. Took a took investment from Marlin. We've we've estimated a deal value at a hundred and ninety million.

I think we might have been a bit a bit conservative there looking at it. Well uh I mean if you look at the numbers, so I mean it's it's in it's an AML, um so it's it's Right is it a context competitor? I actually don't know it well enough to know, but it's certainly in It it's very much an it it I think it is Napier.ai. So it's it's very much an AI centric, founded in twenty fifteen, so very much a chapter two business.

Grown organically revenue from one million to eighteen million since twenty nineteen. Uh, and that was to twenty twenty three. So that's a slightly outdated number. All organic has lost money over that time, but not in ridiculous VC kind of lost as much money as it did in revenue. So I'm assuming the run rate revenues are well into the twenties now. Right. Given that the if you do the numbers on the last Contexa deal, now it's not growing as quickly as Contexa, which is growing at

Still growing at forty, fifty percent, I think. But it's growing at thirty percent, Napier. The last context deal was done at I think twenty times ARR. Right, fine. So you could see I don't know. We're rightly, I think, being a little bit sort of negative in this. Uh in this episode because it's quite tough out there. Yeah. But there's some cool stuff going on. Yeah. That's an ama I'd never heard of it. And it's gone from nowhere to twenty five.

twenty plus million revenue organically in a few years. Yeah. So there is a lot of cool stuff going on out there in the industry. What there's one and and there's another one, sorry to interrupt, but there's there's one um even in IC services or in the in the data center space. So there's a company that we uh my colleague Nathan, he uh He wrote on their latest results. We just spotted it coming out coming out on Company's house. Looked very interesting. It's a company called Fluid Stack.

Cool name. Very cool name. Uh there's a business out in the US called Coreweave, which basically historically was you know essentially render farms. um, für die Media Post-Produktion. Ja, für die Media Post-Produktion. I wouldn't say that to them. No. Well I suppose they'll see this. So um but uh what but you know, it's basically GPU as a service. It's uh it's it's a it's a data center hyperscaler but for GPU. So as part of the AI

uh gold rush, they're the guys selling the picks and shovels basically. And core we've very rapidly grown. Mega IPO happened actually just a couple of months ago. The share price has then has then fallen flat because everyone's worrying a little bit about Uh well, worrying a lot about their customer concentration, um, and also the CapEx bill. So it comes back to what you're talking about hosting.

Um but Fluid Stack is I think the UK's answer to core weave uh a couple of years behind, but already gone from I think five million of revenue to twenty one million of revenue in one year. It keeps just growing quickly. They're potentially the rumors are they're doing a kind of two hundred million pound.

raise or productivity round or or some sort of combo round to fund more data center expansion. So there's some cool stuff in in in the UK, whether it's AI or not, fundamentally there's some very, very good businesses out there.

So having been positive for a second, we've now gotta talk we've now gotta talk about PE. We've got to talk about PE debt, uh which which is something that look, I I think that uh w we we write about individually companies uh in in megabyte that and we obviously

comment on the state of the balance sheet. But we both you and I were both very much of the view that we needed to dive into this and w we we need to dive into it reasonably quickly based you know, to to to to so we don't um run over the time allowed too too much. But

Wha what are we talking about here? We are talking about a change in uh a a a a P E structure where obviously there's typically obviously debt in the structure where you will have I don't know Four or five turns of debt uh of EBITDA. And that was all hunky-dory when uh interest rates were basically nothing. That obviously turned a couple of years ago. And what we've seen since is quite a number of the PE backed businesses that we track struggling with too much debt. And

Um, that is starting to cause I think signific th I suppose that we we can chat about the the sort of the the the the consequences of that, but it's fundamentally starting to cause a lot of stress on balance sheets for the companies we're looking at. And I guess there's there's two there's two main elements to that. Uh one is one is existential and one is m more about returns for investors. The existential one is, and we're seeing this quite a lot. Uh

my cash interest, I'm not generating enough profit for my cash interest. And obviously if you get to that for my for my bank debt, if you get to that point, you've got serious problems. And certainly we've seen a number of companies where they are well over that. So

Uh the example I would use and we're gonna be careful with examples here because obviously we don't we don't wanna be unfair to anyone that that that that is that is we don't wanna we don't wanna set any hairs racing. But there's have been a few companies that have already had Um restructuring. So OpenGI and the software is one I would talk about where the Montague business.

Um and it had uh I think it refinanced in the in the peak of the post COVID era. And ultimately, I won't go into the detail of it, but Um ultimately Ares, the debt provider, ended up owning the business. Yep. And uh Montague Montague will have made a return'cause they recapped it. So it's not they made no return, but in terms of the current status, as far as I know, Montague have been left with very little or nothing of their of their of their um

of what was left. Um so, you know, that that has not happened too many times, thankfully. So that's one and that is hopefully not going to happen too many times. Two is a bit more benign, which is We've got enough money to cover our cash interest and or we've got very supportive shareholders and banks and we can sort of trade through it. But you've got this ticking time bomb of roll up interest.

in uh loan notes. And most listeners will be aware, but just to be clear, most private equity vehicles, the private equity investor will put the uh their equity in as a lone note or mo almost all of their their investment in as a lone note'cause it's more tax efficient. And uh they will roll up the interest within that typically at the moment in I think double digit percentages, twelve percent or thereabouts.

So if you're not growing your E bit DAR at more than twelve percent a year, well no, it's not that math isn't quite as simple as that. But if you're not growing your EBITDA a meaningful amount, depends on the leverage levels, et cetera. then you're you're not gonna outrun the loan notes. And I think that's where we're seeing most of this, which is

The private equity investor is just not gonna make the returns that they thought they were going to because of the leverage in the balance sheet. And I and the lack of growth. And I also think that point you'd make about cash interest, I think, is another important point where you might not be in a situation where you're even stressed.

Um but fundamentally if I think about particularly IT services, even if I look further in and IT services or IT consulting, these are markets that are brutal. They require consistent investment, consistent consistently staying ahead of uh market trends, you know, th this is a hamster wheel where certain services which were high margin previously are now much lower margin. There's just margin attrition on this stuff.

Uh and so you always need to be staying ahead of the curve. You need to be investing in the next set of talent, the next set of technologies. Finding the next vendor. And now it it's more critical than ever. Than ever. Because of where we are with the whole transition to AI and all that sort of stuff. And you need cash for that. And so if you're spending, you know, there are some companies, again, I won't say names, but we have covered them on on on Megabite.com.

Um, you know, we their eighty five percent of their operating cash is just going towards servicing cash interest. They might have a data center which needs CapEx just to s keep running. Uh and so from that perspective you've got these companies which are generating actually quite a lot of operating cash and they have very little cash left over to actually invest in the things they need to invest in. They need to invest in the the the you know, the the moon shot.

of five years time. They need to be investing in IP. They need to be, you know, developing widgets or bits of software that makes a service better. They need to be investing in AI in the core business to improve co operational delivery or whatever. And that's this sort of slight th and then we're going, we don't want to get into AI, but that's a slight myth with AI that somehow you can make all this stuff happen without investing. Yes.

You know, with you know, with automation it costs money up front and then you make the savings. Yeah, absolutely. So so um, you know, from fundamentally from my perspective, even if we're talk not talking about balance sheet stress, although there I think there are businesses out there with balance sheet stress We have to think about management equity incentives. So if you're talking about a situation where private equity just get their money back.

That means the the the management teams, their suite equity, is that underwater?'Cause if that's the case then where's the incentives? You know, what if that's one of the reasons of getting into the world of product equity is those management incentives. Um it's really it's really difficult to do all of that. So there's all these little things that will

be a problem before stress. But there are also trying to synthesize what we think the the the issues what we think the consequence of this might be. And I think we've kind of pulled out four and some of which you touched on, but I'll just sort of run over it again. I think I don't think thankfully we're gonna see too many where the banks take the keys. I I don't think we're s we will probably see some more of that.

There are w there are a small handful, maybe two handfuls, not even two, probably a handful of uh of of um companies where we look at it and go, Yeah, the banks are definitely gonna take those keys. It's just a case of what mostly it'll be around returns. And I think that, you know, we talked about when and I just think

I I I suppose it's obvious to some degree. You know, a lot of the investments that were done in twenty one, twenty two, they're just not gonna deliver the two to three, two and a half to three times minimum equity return, private equity return thereafter. Some of them will be a lot less than that. And we're gonna have to go through that. I think

It's also an impact on MA volumes. Yes. Because that's one of the factors, key factors. We'll talk about MA in a minute, but it's one of the key factors with MA is that you know, if you've got a lo it's again it's it's slightly obvious, but to t to state the obvious, if you've got a loaded balance sheet, you're not likely to be doing MA. And I think that's been a uh the case with the some of the some of the businesses we know that were

uh acquiring in volumes um beforehand are just not now. Yeah. Again, I won't go into any names. There are some, we talk about focus, which is re you know, it's d done its deal with HG Capital last year. Yes. And And is cracking on with its M and A programme. But it's it's reset its balance sheet and I d I don't know what it was like beforehand, but it's certainly fine now and it's got H GA is a very well uh heeled investor behind it, so all good.

So I think I think you're gonna see fewer MA and what we might see again and I wouldn't wanna overstate this, is we might see more companies we might see a bit more IPO activity, mainly around more management wanting to be involved with pack capital markets'cause

They might feel that's a better option if P E is really more as challenging as we think it's gonna be. But I wouldn't overstate that. No. I I think more is more the first three that I talked about. Yeah, I think so. And I think uh yeah, uh your point about M and A as well. Um it's also I think from my perspective, again I C T is the type of MA.

uh people are gonna be much more careful about just buying eBid DA. I think there's still a place for buying EBITDA, buying scale. Um but also if you can buy a business that that adds something to what you're doing, a new capability that drives long term organic growth.

that's probably going to be more attractive than just buying something that does exactly the same thing as you, add some EBITDA, but maybe, you know, lower organic growth, not as attractive organic growth, or it's not really adding anything. I think that's gonna change the shape and the nature of that kind of M and A, which might r result in

Yes, MA as a lot of it. But interestingly it it doesn't it it doesn't seem to be nearly as much of a factor in the software world. I mean we'll talk about the MA stats in in in a minute, uh software versus I C T services and there's just a lot more activity in software still. An interesting I d I sort of few notes. uh you know, on some of the larger acquirers in the in the software industry and

You know, I you talk about Access Group, Idea Gen, it's a couple of examples. You know, Access Group and it's last I forget the year, but it's the m the accounts we've got on the platform, the most recently r uh uh released ones. Free cash level of hundred and thirty five million, cash interest of two hundred and seventy eight million. Idea gen, free cash flow of for t of uh thirty six million and four tillion of cash interest. So there's a lot of v leverage in those software businesses as well.

But I just think the higher multiples we're talking about, more organic growth as we've talked about. Yeah. I I think that

I'm not suggesting that there aren't going to be some issues around that, but I'm not s they're probably not as existential. The point I was making though is that those businesses are continuing to acquire. Yeah, they are. So so so I don't think there's much of a as much I mean, they're gonna get need to get those balance sheets sorted out. Yeah. But I think with all of the The valuation, the growth expectations being better, I don't think that's as much of an issue as it is with

I C T services. I mean if we get more growth coming into I C T services as as we hope will progressively happen, then that will help to solve the problem as well,'cause growth solves a lot of problems, right? Um but overall it doesn't seem when the MA piece specifically it doesn't seem to be as much of an issue as it is in software, as it is in I C T services. Yes. Okay, we better move on from uh private equity and we will talk now about what's going on in venture and growth capital.

So if we dive in, I mean I I we're not gonna spend a long time on uh venture growth capital uh because it's a very interesting area. It it's not an area of of the market we spend a lot of time on at Megabyte, but it but it is an interesting it is an interesting part and we've got to talk about uh about it. uh in the sense of of overall sentiment. So go through the stats. Total funds raised. Again, it always makes me smile when I'm thinking about this relative to the capital markets. So

In a really bad quarter for venture capital there was still over a billion of cash raised, down twenty percent year on the market. What was it capital markets? Forty million. Forty million. Oh god. Um and that was a decent performance. Um, the one of the biggest factors in venture growth capital is pre-series A. This has been something I talked about on the monthly podcast we did previously as a long running theme.

We have seen an absolute collapse in very early stage uh VC funding. And there were only eleven pre-series A deals. These are the very small deals. in Q one down from forty one in the previous year. That is a number going back to my point about revisions. That is a number that typically gets revised up more than most. Um but even so, really weak and I'll come back to why that's important in a minute. Series A down fifty two percent, thirteen deals.

other series, so s series C to God or whatever end up, series H or whatever, was actually up forty two percent, twelve deals. So there is quite a lot of activity in that series B and onwards, which I think is positive. Growth capital down thirty one percent to twenty five. So there's a uh there's a there's a reduction there as well.

What do I think is going on here? I'll be quick as I said. Um, a couple of things really to talk about, just to focus again on focus in on this idea of of fewer uh early stage deals. I think that's just a confidence thing. You know, it's two things. It's a confidence thing You know, if it's hard for some of the established businesses we talk about trading at the moment

For startups it's five times harder. Yeah, true. If you're a small, early stage, unst uh uh not yet to be properly established software business, trying to sell to banks or government, you're in a whole world of hurt right now. So getting that funding is just very challenging.

And also the other element is is that all the VCs understandably looking for AI, really genuine AI native companies. And they're just a fewer of those around at the moment for them to invest in. So those two things I think are feeding into the the issues with with pre series A funding. The the ticking time bond to some degree, um, that that I've talked about in the past on the podcast is that is going to mathematically provide fewer opportunities for series A deals.

And you're just gonna see fewer Series A deals as a result. I'm already hearing uh one of my other things I uh I do apart from my megabyte job is uh sit on the board of one of Albion's venture capital trusts. And they've been saying for a while, interestingly, that it's c there's it is despite the fact that it's a tough market in V C

Um series A but even more so series B and Series C deals are really quite competitive already. So what you're seeing is the funnel we talked about is uh is the top of the funnel is much, much smaller than it used to be. So that's pushing fewer and fewer deals down. So that's cre iron it's sort of counterintuitive.

You've got overall tough market, but you've got quite a squeezy market in Series A still cash, they've still got to deploy the cap deploy the capital. And so that's gonna be a feature, I think. And then just to finish off and talk about the AI bit.

This is where it's all happening in AI at the moment. Um context is a big one. I talked about that deal. Hund a hundred and thirty six million Series F raise at a two billion sterling valuation. Luminance is another quite high profile. That was a sixty million Series C in legal AI legals, I think an area in AI, everyone's saying it's gonna be a big deal. Yes. And um fundment, I also have to talk about fundment, although that's uh it is AI but it's not an AI native.

in wealth management, um, forty five million C from Highland Europe and others. I mentioned Luminance and Fundment partly because they were both winners of our uh in the Emerging Stars Awards uh during in March. Luminance, overall best performing, investor backed. Company and fundament best point fintech. So they're raising money. Yeah. Flight quality. Yeah. Um, so that's kind of interesting. So I think that's all I wanted to say about venture and growth capital. Tough market.

Some slight weirdness around that that that funnel or lack of funnel into Series A and it's all about AI. I know it might be a bit early stage for for the way that you guys look at it, but I mean is it that that you talk about the funnel being much smaller. Do you think that there's things happening that will improve that funnel? Like are there these early stage projects which will get

I think you'll you what you will see in the mistake I made, and I've talked about this in my January podcast and I was reviewing my predictions from the previous year where I thought it was going to get better in twenty twenty four and it really didn't. Yeah. I think partly the avail my mistake was thinking there was going to be a

a higher availability of early stage, really high quality AI businesses. Right. And there just isn't. Oh, fine. Uh they're just you're just not si if there were, they'd be getting funding. Right. I I I think what you're seeing is a transitionary period where

uh you take an example of a vanilla SaaS company in H CM software, whereas it would have got funded five years ago, it's just not gonna get funded now. Because the world does not need another vanilla SAS HCM company. What it needs is some really sexy AI

company and they're just there's just not enough of that yet. Right, fine. But it is a bit self fulfilling because they need funding. Yeah. They need early stage funding. So I I but I think I think we will see that ch as a as the the Goldilocks period as we talk about with AI develops over the next five years.

you're just gonna see progressively more of those and you will see a progressive improvement in the deal volumes in in early stage around those AI, but it's gonna take it's not gonna be it's not gonna be a VR a V curve. I think it's gonna be much more of a gradual recovery.

Okay, let's finish off uh talking about MA and I think that's a good thing. You won't be surprised to hear me say it was quite an MA. Um and I think that, you know, just talk through the numbers. Software deals ninety six, that was down twelve percent. So still quite a healthy quarter for software MA. ICT services down 32%, only 52 ICT services deals in the quarter.

Uh key takeaways, I just talked about it, more going on in software than ICT services. And in software, there were at least a dozen 50 million plus deals in the quarter. So it's really still quite active in in software MA. You have seen less. Of the volume MA, definitely, than you did see a few years ago back when Access was acquiring two or three businesses a month. Right. It is still acquiring, but it but not to that rate. And

You know, we've got the same drivers here, I think, in I C T services and I'll ask you to comment on this in a second. Same drivers in I C T services as we did pref uh we've talked in other areas, debt levels, growth outlook, etcetera.

Uh so what's your what's your sense of of what's going on there in terms of IC w I think we've covered a lot of it, haven't we? But I mean what else would you add? It's it's a difficult one because if I talk to uh a lot of my companies I talk to There's appetite there. But it's really hard to quantify appetite or put it into any sort of anything other than just sentiment.

But fundamentally there's appetite there. But the problem is that interest rates does have a significant impact on so ninety, ninety five percent of the MA that happens in ICG services is by PE backed or debt backed. uh acquirers. And so interest rates and what's happened with interest rates in such a short period of time. It's not just that it's gone from basically free to now, you know, still cheap in the grand scheme of hist history, but

it's how quickly it went. The models just did not expect this the interest rates to rise that quickly. Um and so then when you're coming to think about what extra debt you're gonna put on your balance sheet to be able to do an acquisition. the criteria is now so much more uh difficult to to achieve. You have to have a lot more f in fighting between the board and the and the and the product owners and the banks basically to to get signed off on a deal.

Uh and so, you know, from that perspective, buyers are being a lot more hesitant around what they're looking at and more picky. Um, then you've got that you've got the element of, you know, what they can actually pay as well. So they finally find an acquisition they really like.

And then they go, I can't really afford to pay more than eight times for this business, that becomes quite a problem when the when the sellers are sat there going, I want at least ten times. So then you just get a bit of a bit of friction from that perspective. So I think all of those things affects M and A volumes. I think also There is just particularly in IT services. I remember when I started covering this market close to ten years ago.

the number of PE backed acquirers looking to do a buy and build in the Microsoft services space. I mean, there used to be one or two. Now there's at least seventeen. Yeah. All looking at the same companies, all looking at the same place.

All with the same criteria. At some point you just gotta go, this is just it's Yeah, but what's interesting is they do that, but they still can't pay up. No, they still can't pay. But you'd think there's the laws of supply and demand would be so you know, I'm thinking if I'm the vendor of a if I've if I'm running one of those companies that might be acquired.

Uh weirdly, it doesn't necessarily mean that you're gonna get twelve times for your business. No, absolutely not. It just means that it just means you can probably pick your acquirer. You can choose who it is. It doesn't mean you're gonna get a double digit multiple. Yeah, absolutely. And so and so fundamentally from the absolute they're all looking and so what's happening is they're now looking. Early and early and early, or there, start here and there.

Th there's some of these companies now have their own core origination functions. Yeah. Whose entire job it is to just go out there, start to build relationships with vendors, maybe two or three years away from any kind of realistic deal. Because if you wait for an IM to land on your desk.

the price is either going to shoot up to a point that you can't pay it or you're in for a real fight. So from that perspective. So every everyone comes to us, yeah, we do we do shameless plugging, but MA Discovery, we help people find MA targets.

More and more they're like, Yeah, we want to do off market deals. And I'm like, that's not special anymore. Everyone wants to do off market deals. Um and everyone's looking at exactly the same criteria that you're looking at at the moment. So it's a it's a tough position. What will happen?

I don't know. I think there's n there's nothing to suggest that valuations can go up significantly. The maths just still doesn't work unless something massive happens to interest rates in a in a downward fashion.

So I think again it's just gonna be a bit of a winners and losers market. The people with the right investments into the right areas of tech, uh, with the right investments in their corporate finance functions and their corporate development functions, they're gonna be the ones that prevail. I mean I think I think the software

I I don't know how many access how many people access groups got in its MA corporate development function, but it's a lot. Yeah. Um and we've done some work for them in the past. And and you know, they are very much on this, but they're looking globally as well now, as is idea gen, as are the big software Consolidators are all looking globally, maybe not advanced, but um certainly RS and and and those guys. And so they've got very sophisticated uh processes around that. Um I mean just

Talking about software generally, but I've said it's it's a relatively solid market, again, repeating ourselves, but it's the all the same dynamics, more solid growth, more robust business models, better valuations.

um more debt availability as a result of that is all supporting it. The one I wanted to talk about, we talk about AI and everyone loves to think that AI is always everything that t AI touches turns to gold. But I wanted just to touch on one deal which is UI pass acquisition of peak AI. Um we've got an estimate of sixty million in there. I don't know how much confidence we've got in that estimate, but Just to uh just regard us of exactly what the number was.

It's interesting to note that uh PKI raised eighty five million uh over well, uh a number of raises since twenty sixteen and got to nine million revenue, which I'm sure is not what they would have wanted to to to sort of do with that kind of level of funding. And uh that was FY twenty three, so they're probably higher than that now. So I don't think UiPath will have paid a massive premium. I suspect investors got their money back, maybe a bit better, maybe not quite as good as that.

And it just goes to show that just because you've got an AI business model doesn't mean you're necessarily gonna have a home run from an investment perspective. That was a V C backed business, obviously. So, you know, I think I think that's uh that's an important one. The other one I thought I'd mention, which I think is quite interesting, is is Carriage's acquisition of ram tracking.

This is in the uh close to home again with my Cortix hat on. Quite an interesting deal. Mainly because I don't think I've seen in fact I'm pretty sure I haven't seen these big established broadly based enterprise software consolidators, buying and telematics, ram tracking is one of the

More significant, uh, UK based telematic software. Is it like an X gen one round tracking? Not particularly, I don't think. And so I wonder whether that might be a thing. You might see more of those that that as a vertical'cause they've done a lot of verticalization. carriage access all of these guys to some degree. And that's not a it's not an area that they've played in very much. So I thought that was an interesting deal from that perspective to see whether happening.

And there's other bigger deals. Laterra Peppermint, that's in a legal space. That was a very interesting hundred and thirty three million pound deal. We think these are all estimates. Easy Park Parkpedia. Doesn't sound doesn't doesn't doesn't sound like a a software deal, but it is hundred and fifty million.

Work day buying Ravel in a hundred million. Yeah. Yeah, work sorry, World Pay, not work day. World pay buying Ravel in hundred million. Some chunky stuff there. Yeah, and now R C T you've got the big one actually, the big the real flagship deal for for for ICT services was

CGI, the big Canadian global system integrator, buying BGSS, which we would argue is kind of, you know, next in line in the UK behind uh behind KMS in terms of digital services, three hundred million pound revenue business. Uh I think that we estimated that as a Seven hundred fifty million pound deal. So quite a significant what probably for CGI's loose chains. Yeah, yeah, down the back of the surface. Um but uh but for BGSS and for the for the market as a whole.

you know, uh an organization like that going to going to trade as an interesting one. We would have maybe expected If we had an expectation of an IPO candidate, that would have been that would have been that would've been another one. Um interesting timing as well, I think, given that the market's still challenging. You would have thought maybe we would have waited for the upturn, but you know.

Uh I suppose if one of these big guys comes to you with a big number. But also if you're an owner managed business with a seven hundred and fifty million pound business then Yeah. You you're doing all right. Good on yeah. You're doing all right. Good luck. And that I think is a nice positive note on which to end. There's lots more we could have talked about. Um but we need to wrap it up there. Thank you so much for listening to the new version of the CO Bromise. I hope you found that useful.

And um you can obviously explore a lot more of the topics, all of the topics we've been talking about, uh, expert insight from our analysts, sector analysis. sector trends. I didn't talk about it specifically, but a lot of the data that we're pulling for the this podcast comes from our two barometer reports that we do quickly on on soft one on software, one on IC one on I C T services that were published last week. But all of our practice area teams

Cyber, IT managed services, HCM, FinTech, all published quarterly reports as well available. Um so go and have a look at what you might might be available to you on megabyte.com. Um if you're a subscriber, obviously, but if you're not, you can find out more there. And please follow us on your preferred podcast platform and join us next time for another conversation about everything that's going on in the future of tech.