Technology & Services Sector Trends to Watch

Investors continue to be attracted to the asset-light, high value-add nature of white-collar engineering and environmental consulting services. Businesses in the space create reliable, sustainable solutions which address many of today’s most challenging environmental and societal issues. Tailwinds in water, transportation, power and ESG in general are incredibly strong and are expected to last decades.

Investment themes addressing trends in ESG continue to be critically important as strategics and sponsors alike prioritize responsible business practices.

Critical service providers for facilities have never been more in demand. CFOs and facility managers are focused on outsourced solutions to navigate increased complexities and provide data-driven, actionable insights to optimize operations. As a result, multi-regional platforms that deliver tech-enabled solutions to the most critical assets and/or the largest segments of a budget are now more important than ever.

While people management in outsourced facility services has always been important, it’s even more critical today given challenges in the labor market. Firms that have a winning culture can better attract and retain talent, which leads to differentiated service quality and financial performance relative to competitors.

The transition to renewable power requires significant new investment to support distributed power generation. Underground and overhead T&D service providers will enjoy the resultant multi-year demand required to transform the current electrical grid.

The U.S. infrastructure bill has attracted sponsor and strategic interest in infrastructure-related businesses, many of which already have successful track records of growth. The bill will act as a catalyst for these already successful businesses and the markets in which they participate due to their mission-critical nature and attractive fundamentals.

We hear about the pandemic-induced ‘Great Resignation’’ but the underlying causes of the current labor imbalance pre-dates Covid. Many ‘skilled labor’ verticals have been impacted due to the lack of affordable higher ed, continued misalignment of enrollment & market demand, lack of career & technical training in high schools, and the rapidly evolving needs in fields like healthcare and tech, etc. Next-gen professional training / learning models that are digitally enabled, closely align or affiliate with employers, and have funding tied to student outcomes will be key in closing the skills gap.

The shifting approach to the workplace has dramatically altered every aspect of Human Capital Management (HCM). For new talent, we’re seeing this in the way candidates are sourced, screened and onboarded. Meanwhile employees want flexible work arrangements, attractive career pathing and enhanced ways to be rewarded. Lastly, employers are keen to support and provide services to their employees, no matter where they are located. Complementing these shifts is an increased emphasis on the strategic value of HR’s role within the enterprise and the accelerated adoption of change, particularly as it relates to the use of new technologies. All of this is driving attractive investment opportunities in the HCM space.

We perceive the ECE market to be in a period of rapid evolution, moving from a highly dispersed landscape where providers have predominantly focused on convenience and capacity to a future state in which we expect the education experience and clearly defined ‘grade level’ achievement will increasingly drive demand, dictate availability of public funding programs for providers and delineate a relatively small group of long-term winners operating at scale.

State and local government entities have lagged in adoption of online / software solutions, with many still using homegrown or manual solutions. Meanwhile, state and local budgets throughout the U.S. are in very strong shape, leading to expected increases in spending across the board – especially into technology solutions. As such, GovTech providers across the full spectrum of functions are set up nicely for long-term growth.

Enterprises that don’t adapt to digital transformation will fall behind or just disappear from the market landscape being beaten by those that recognize the disruptive impact on business models and entire organizations. Making an organization more agile, efficient and scalable is key to staying competitive. Greater speed to market has become mission-critical for success.

The increasing demand on businesses to deliver with agility and at hyper scale pace is shifting the focus from systems of record to engagement. We are in the early phase of the impact of increased use of AI and automation which is starting to unlock further competitive differential improvements in processes, workflow, personalization and verticalization.

Recurring revenue software businesses will continue to be among the most in demand assets by investors, and among the highest valued. Medium and large enterprises have no choice but to increasingly rely on software solutions to address a growing litany of pressures to reduce costs in all corners of the P&L, leverage sprawling data stores for actionable insights and deliver better customer experiences. We expect continued strong activity in a number of SaaS sectors, notably GovTech, industrial tech, HCM, GRC, supply chain, and vertical “system of record” applications.

Consumers have grown to expect a tailored purchasing experience based on their individual preferences and to start their buying adventure on one platform and continue on another, whether it’s in-store, mobile device, social network, etc. Brands and retailers need to continue to better understand the interests of their customer behavior and coordinate their offline / online sales strategies across different platforms. We see these and many other trends driving consistent demand for technology and tech-enabled services that can achieve these critical goals that have become table-stakes for brands and retailers.

Companies will be more valuable that have enterprise-wide visibility, know their vulnerabilities, can break down data silos and create meaningful intelligence. Agility is key to operating in increasingly complex, digital and distributed environments.

The last two years have only exacerbated the need for better risk and compliance management solutions across the business environment, and the demands have only become more complex as companies try to stay ahead of the shifting business landscape and balance demands of investors, regulators and stakeholders. Because of this, we will continue to see companies use fewer vendors and focus on integrated solutions that provide a single source of truth. It will be imperative that these third party GRC vendors demonstrate solutions that drive improved workflow efficiency, better decision-making, optimized cost management and closer stakeholder management. Additionally, increasing investor and regulator demand for ESG reporting and transparency will make software and data solutions fundamental to meet evolving needs.