PE Firms Have Paid Richly For Software Startups. When Will They Resume Spending?
IPOs generate a lot of buzz. Acquisitions by private equity firms, not so much. After all, most founders don’t start out with the vision of selling their startup to a leveraged institutional buyer looking to profitably offload it again in a few years. It arguably lacks the narrative appeal of, say, a sale to a tech giant or a smash public debut.
Nonetheless, for software companies in particular, acquisitions by private equity firms are statistically one of the more common kinds of exits. Over the past five years, the most-active PE buyers have collectively spent over $36 billion to buy dozens of private companies in the space, Crunchbase figures show.
As illustrated in the chart below, M&A deals for private companies peaked in 2020 and 2021, and slowed considerably in recent quarters.
A similar trend is apparent when we look at PE purchases of both public and private software companies:
We can point to a few factors over the past couple years that likely contributed to the slowdown in PE deals. For one, global software investment and M&A is down overall. Valuations have also been in flux, with high-flying startups readjusting following public market pullbacks.
Additionally, in hindsight, PE firms, like most acquirers, probably overpaid for many boom-era deals. That should leave them more wary of big-ticket purchases going forward. Higher interest rates and a chilly IPO climate serve as further hindrances.
Still, we shouldn’t let a few sluggish quarters distract us from the bigger picture. This is that, consistently, a handful of private equity firms account for a large share of the biggest software exits.
In particular, the eight firms listed below stand out.
Many of the pricier deals involve venture-backed companies. Over the past four years, the largest include:
Notably, most of the larger deals happened at least a couple years ago. That’s not surprising, as PE deal volumes and prices tend to rise when exit opportunities are bountiful and financing terms are comparatively cheap. Lately, of course, those conditions have not applied.
The future remains uncertain for private equity firms in the software space. While there has been a slowdown in recent quarters, industry experts suggest that it may be a temporary effect of various factors such as market fluctuations, valuations, and IPO climate. However, there is optimism that PE firms will resume their spending spree in the near future.
According to John Reynolds, a software industry analyst, While the recent slowdown in PE deals is notable, it’s important to look at the bigger picture. Historically, PE firms have played a significant role in the growth of software startups. With the market stabilizing and the potential for new investment opportunities, we can expect PE firms to regain their appetite for acquisitions.
With interest rates expected to stabilize and the IPO climate showing signs of improvement, private equity firms may find themselves in an opportune position to make strategic acquisitions. However, caution remains a key factor, as past overpayment for boom-era deals has led to a more cautious approach.
In conclusion, while private equity firms have paid richly for software startups in the past, the recent slowdown in their spending raises questions about when they will resume their acquisitions. However, industry experts remain optimistic that the market will rebound, presenting new opportunities for PE firms to invest in software companies. Only time will tell when these firms will regain their momentum and continue their investment spree in the software space.
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