While much of the media’s attention is on solutions and companies poised to take advantage of the pending “Connected Car” era, the investment community has made some big plays in automotive retail technology.

Within the last 42 months, according to data compiled by The Banks Report nearly $50 billion in capital has changed hands through IPOs, mergers, investments and acquisitions involving automotive retail vendors — most of whom focus on technology solutions for car dealers.

And the trend is likely to continue as numerous P/E firms, hedge funds and other investment companies are taking a hard look at various vendors in the space. The list involves big name firms that have already made big investments — Thoma Bravo, KKR, Elliott Management, Vista Equity and Warburg Pincus.

From our perspective, four dynamics are driving this increased interest from large investors.

1. First, is the historical dynamic. Over the last decade, investors have made nice returns in the space.

• It really began 10 years ago when Bob Brockman acquired the leading dealer management system (DMS) provider Reynolds and Reynolds for $2.8 billion — what amounted to $40 a share. It was the largest deal in automotive retail at the time. It was financed by Goldman Sachs Capital Partners, Vista Equity Partners and others, along with with debt provided by Deutsche Bank and Credit Suisse. Even though the company is private today and information is hard to pry loose, the early investors apparently did well. In late 2012 — early 2013, KKR reportedly offered $5.2 billion to acquire the company. Brockman turned it down, but the offer reveals what the Reynolds was valued at three years ago — and it’s probably much higher today.

• Automotive classified listings site Autotrader (started by Cox Enterprises in the late 1990s) is another company that historically investors have done well with. In late 2010, Providence Equity acquired a 25% stake (approximately $537 million) in Autotrader to help finance an aggressive acquisition strategy. Providence exited the company in early 2014 for a reported $1.8 billion — a return of more than 3x in just over three years. Today, Autotrader, along with the companies it acquired during that three year period — Kelley Blue Book, vAuto, Homenet, VinSolutions —  Dealertrack, which it acquired last year, Next Gear Capital and Manheim form the backbone of Cox Automotive, a $5 billion a year division of Cox Enterprises.

• Last summer, Cox paid $4.1 billion (approximately $63 a share) for the publicly held software firm Dealertrack. Investors in Dealertrack received a nice premium as the stock was trading at $37 when the deal was announced.
• Meanwhile, CDK Global investors have to be somewhat happy, although they want to see more return for their capital. The company completed an IPO in the fall of 2014 following its spin off from ADP. The company’s stock price was trading at $25 a share early on. Earlier this week, CDK’s stock price hit its all-time high of more than $58 a share. Analysts and some of its investors believe the stock could hit $81 a share in the next year — if CDK isn’t sold.

2. A second dynamic that drives investor interest is the innovative nature of automotive retail technology. The industry is fragmented and entrepreneurial in nature and that has created an innovative mindset. Small entrepreneurial focused individuals come up with an idea, turn it into a solution that dealers and automakers use, and then have been able to sell their companies to larger players.

It’s not perfect and there are many failures, but it’s capitalism at its best. There are numerous people who have followed that playbook and have become quite wealthy over the last 20 years.

3. The extraordinary sales growth in automotive since the recession in 2009 has also attracted investors. Last year was a record year with 17.4 million vehicles sold — up from 10 or so million in 2009.

In many cases, companies profits have more than doubled while valuations have gone through the roof. Invest in the right horse, and there is money to be made.

The sales peak might be over — at least for a couple of years as some analysts (myself included) see a slight contraction this year. But any year with 16.5 million to 17 million sales is a strong year. Furthermore, it’s not a reach to say the industry will hit 18 million to 19 million sales by the end of the decade, based on demographics of millennials entering the market.

4. Finally, the pending convergence of automotive retail and connected car technology should create an explosion of new innovation in several areas over the next three to five years. Online car buying; financing; marketing automation; artificial intelligence and service and repair technology will be huge areas of opportunity and growth.