The Pace of Automation: Hg's Matthew Brockman and David Toms talk it out
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What macro trends are influencing the software market in 2023?
I think there is a sensitivity around pace of growth as opposed to is there growth? So if I think about adoption, it's the long-term trends are still there. More more automation of workflow, more automation of jobs, more automation of processes that could be done by white-collar workers. Whether that gets sold at the same velocity in 2023 as it would have been sold in 2020 is where you're trying to make a calibration of an investment commitment. Hello everyone and welcome to Orbit, the HG podcast series, where we speak to leaders and innovators from across the software and technology ecosystem, discussing the key trends changing how we all do business. I'm Matthew Brogman, managing partner at H G, and today I'm back after six months from April talking to H G's head of research, David Toms, to discuss some of the key trends we're seeing in the software sector over the last quarter.
Been another interesting six months in the public markets, David. How would you characterize what we've seen in the last six months? It's been quite amazing when you look at the
I suppose the the cycle we've been through. The the last six months essentially unwound a lot of the euphoria that we saw during mid twenty twenty through to twenty twenty one. And i i you know, essentially we're back to twenty nineteen in public markets terms.
So do you think that's in any way structural or do you think we just saw a bit of a bubble based on free money and, you know, fiscal response to Covid? Do you do you see a sort of a a real fundamental change in the way people are thinking about software investing? So I
don't see a fundamental change in the way people are thinking about software investing or the end market. I think The two things that have changed since the end of last year are the interest rate environment, so effectively the cost of capital, and then the other thing that's changed is the expectation of a recession, which I think is now pretty much a nailed uncertainty. So there's a little bit more concern around trading and a slightly higher cost of capital, and it doesn't take much of a change in small elements for you to get potentially large
valuation swings. So interesting article, I think it was this very morning on in the FT about the lack of IPOs in the US market, tech IPOs. That's just investors deciding to sit on cash, is it, do you think? Or is there some there isn't that we shouldn't take that as a kind of signal that people s feel they need to be selling software or selling out of tech? It's a reluctance to
commit new capital. I think we have to remember that public markets are no longer quite the arbiter they once were. But I was looking at some stats only a couple of days ago which showed that in fact over the last decade Private equity has deployed more new capital each year than public markets. Although everyone thinks public markets are very, very large, mostly you're just trading IOUs between each other, as in share certificates, the actual amount of new capital public markets deliver isn't that large. Whereas private equity is much more about investing new capital and then selling on the businesses. So I think it definitely reflects a bit of a change in sentiment. But more than anything, what goes on in the public markets is driven by capital flow rather than by an active decision by an investor.
If you have no new capital coming in. your fund or worse you've got redemptions for your fund, then you are a forced seller and it's very hard to buy something new.
How did the last six months of public‑market performance unwind the 2020‑2021 euphoria?
It always strikes me as such a pronounced effect, particularly here in Europe, because you've got very few now listed large software companies, certainly on the London Stock Exchange, and I think more broadly across Europe. And if I think about the value of our portfolio in aggregate, it's about $115 billion or something, which means only SAP is bigger as an aggregate software company in our in our European market space. So this sort of v the value of the kind of the private market and the scale of the private market relative to the public markets is is already pronounced and it feels like we're going through another sort of reset or some some kind of at le at least an adjustment on kind of appetite to to deploy equity.
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Chapters
6 chapters
1
What macro trends are influencing the software market in 2023?
0:03–2:58
2
How did the last six months of public‑market performance unwind the 2020‑2021 euphoria?
2:58–5:52
3
Why are private‑equity funds deploying more new capital than public markets?
5:52–8:03
4
Is 2023 the year of P2P transactions and should investors chase private deals?
8:03–10:38
5
Are long‑term automation and workflow adoption still accelerating despite a recession?
10:38–12:39
6
What are the current assumptions about software‑industry growth rates and are they wrong?
12:39–14:23
Speakers
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