An increase in M&A activity in the technology sector this year is being led by private equity firms.

M&A activity in the technology sector increased by 76 per cent in the first half of 2010 compared to the same period in 2009, with 96 deals signed off.

The rise was driven largely by the return of private equity firms to the sector, according to a report from Clearwater Corporate Finance, which also finds that the number of technology deals is up 31 per cent on 2008 levels.

Emma Leathley, senior technology analyst at Clearwater, has seen a large rise in completed private equity deals this year, as well as an increase in transactions under way. She adds: ‘The re-emergence of private equity firms has given the market as a whole more confidence with regards to acquisitions. Their return has been a big reason why we’ve seen the volumes grow so much.’

There were 25 private equity buy-outs in the technology sector in the first six months of this year, up 56 per cent on the previous half-year and 250 per cent on the first half of 2009.

Leathley comments: ‘A lot of the private equity market was put off the technology sector following the dotcom crash, as well having as a general feeling of not understanding the market well enough to make an investment decision.

‘Now we’re seeing a lot of interest in areas that are easier to understand such as IT services, as well as high growth areas such as software as a service. We’re seeing a lot of appetite from traditional mid-market investors for those types of businesses.’

While the number of transactions may be increasing, there are still relatively few high value deals taking place. There were only five deals in the first half of the year with values over £100 million, compared to 15 such deals in the whole of 2008.

An increasing number of overseas buyers have also been active in the UK technology market this year. US trade purchasers accounted for around 30 per cent of all transactions in the first six months of 2010 compared to just 7 per cent for the same period in 2009.

Trends to watch in the second half of 2010 are consolidation in the IT services market, quick sales in the public sector and continued interest from US private equity firms in UK technology companies, the Clearwater report concludes.