Link to original article: PE firms stick with enterprise software bets
Sales of PE-owned enterprise software companies got tangled up at the start of 2023, hitting the lowest deal level since Q2 2020.
Between the decline in technology valuations, a dormant market for new listings and the scarcity of cheap deal financing, PE firms exited only 23 US-based enterprise software companies at a combined value of $4.2 billion in the first quarter. In Q2 2020, PE exits recorded $3.3 billion across 16 deals, according to PitchBook data.
PE sales in the sector fell off a cliff in 2022 and have remained subdued this year. A frozen IPO market and the difficulty in securing financing for large transactions kept tech valuations at lower levels, prompting more sellers to hold on to assets longer, said Derek Hernandez, a senior emerging technology analyst at PitchBook.
“Lenders, VC and PE investors, and corporates who are involved in these transactions had a higher cost of capital and weren’t handing out cash the same way they did before,” he said. “Because of that, you end up with smaller transactions on average.”
Companies with the financial means to weather the storm are trying to avoid putting themselves on sale in an unfavorable market environment, he said.
The lion’s share of PE exits announced so far this year came from sales to corporate acquirers and financial sponsors, and only one PE-backed enterprise software provider went public, PitchBook data shows.
TruGolf, a manufacturer of golf simulators, is slated to to go public via a SPAC merger at a valuation of $125 million. The transaction allows Toronto-based firm Flow Capital, which supplied $3 million to TruGolf in 2015, to net a profit.
Vista’s vision
Investors in enterprise software see compelling opportunities during this downturn, as they expect the accelerated pace of digital transactions in the corporate world will continue to fuel growth in the sector.
“We continue to be excited about the tailwinds of digitization across all verticals,” said Rachel Arnold, who co-manages Vista Equity Partners‘ Endeavor funds, which target lower-middle-market enterprise software companies with at least $10 million in revenue.
“We’ve seen secular tailwinds in hospitality, cybersecurity, governance, risk and compliance, and financial services, just to name a few,” Arnold said. “And interestingly, in our portfolio, we see the companies that sell to the small and medium-sized businesses continuing to perform well, despite recessionary concerns.”
Companies worldwide are expected to increase their technology spending this year despite worries about a potential recession and volatilities in financial markets. And enterprise software and IT services stand to be the sectors experiencing the largest growth, according to a forecast from research firm International Data Corporation.
Vista has overcome adverse market dynamics across the PE landscape. The firm has announced several exits through secondary buyouts this year. Notable among them is the acquisition of Zapproved, an legal software provider picked up by Leeds Equity Partners‘ portfolio company Exterro.
Vista also sold its stake in Fusion Risk Management to Boston-based PE firm Great Hill Partners, and exited its investment in Tripleseat, which was acquired by General Atlantic.
Vista remains a minority shareholder in all the transactions, which Arnold said is to show its confidence in the future of these businesses by keeping some skin in the game.