PE and Software Trends and Deal Differentiators 

Bain Capital recently released its Global Private Equity report, which includes a deep dive into the recent explosion of PE investments in software and technology. 

A few key statistics: 

  • PE investors closed $284 billion in tech deals last year. 
  • Tech deals comprised the largest share of deals for any single sector: they accounted for 25% of total buyout value and 31% of total deal count. 
  • Software deals made up $256 billion–90% of the total tech deal value. 
  • Buyouts of large, maturing companies (e.g., Proofpoint or Cloudera) accounted for 41% of the software total. 

That last figure caught my attention because it means that the remaining 59% of software deals were buyouts of small to medium-size companies. If you’re the founder of growing software company, that’s excellent news! 

Why do PE funds love software companies?
What’s driving this explosion of PE investments? Several factors: 

  • A lucrative payment model: Investors love recurring revenue associated with SaaS subscriptions, which is rapidly becoming the most popular payment model for software companies. 
  • Plenty of targets: The number of software companies is multiplying each year–according to some estimates, there will be 1 million software companies in the world by 2027!  PE funds have plenty of choices to build a robust portfolio of software firms.
  • Emphasis on digitization: Business leaders across all industries consistently rate digitization as a high priority, which will undoubtedly lead to continued increases in software spending. 
  • Unmatched IPO potential: It’s tough to beat an IPO as an exit strategy, and the IPO market for software is booming. 

A New Era of Active Investment

In past years, founders often shied away from working with PE funds. They usually feared that the cutbacks associated with this kind of investment would threaten their company culture, for example. 

But those tides are changing. According to a working paper published by the National Bureau of Economic Research, PE managers are increasingly prioritizing revenue growth over cost reduction to drive investment returns. Meanwhile, we’ve also seen a trend toward more active investment, including the more hands-on guidance and advice usually associated with venture capitalists.

The Bain report cites Hg Capital as an example here. The company’s Hg Hive platform brings together thousands of professionals and subject-matter experts, along with a wealth of resources (such as playbooks). The purpose of the Hive is to promote learning and best-practice sharing across all its portfolio companies, so they don’t have to start from scratch when they develop new capabilities. 

Positioning Your Company for a Deal

PE firms use a variety of metrics to assess the “attractiveness” of your company when looking and/or exploring in closing a deal.  Solid founders, a great product, and proof of growth in a upward trajectory are hallmarks of all prospects seeking funds. Positioning is a strong factor to get the necessary attention.  Below are some considerations when looking to get the right attention from PE firms to get your company to the negotiating table: 

  • Don’t fixate on being the master of your domain. Companies that dominate their category are often the most attractive investment targets. But investors also look for strategic partnerships that could bring additional value. For example, consider how you might work with a key client to build more functionality that would increase business value for the industry. 
  • Be patient. PE funds often prefer to invest in mature or maturing enterprise software companies because these investments have proven to be a lower risk. They want to see that you’ve successfully navigated that initial rapid-growth phase and have a plan for sustained scalability. 
  • Demonstrate consistent, stable revenue. This is where the SaaS pricing model comes in (and the more “sticky” your software, the more valuable your subscriptions). I also strongly encourage founders to think about how they’ll improve their customer lifetime value (CLV) over time – how will the subscription fees increase, for instance? Can you make new features exclusive to a more expensive subscription package, or cross-sell another SaaS product? 
  • Remember that you’re in the data business. Sometimes the value of a software company isn’t so much in what the software does, but what data the software collects and processes.  Integra’s SunriseBilling system is a great example here; the software certainly saves time and money in the subservicer billing process, but it also enables robust forecasting – so business leaders can make more informed decisions and ultimately increase the profitability of their subservicing. 
  • Work with the right advisors. Technology presents unique complexities and challenges because it is constantly, quickly evolving. Partner with advisors who have specific, deep expertise with technology and software.

CTA RE partnering with Oxygen Ventures

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