Good Performing Software Funds
Has anyone seen any buyout software funds actually performing well recently? Vista, SL, Blackstone, Insight, Clearlake, etc. all seem to have rough recent vintages. Even MM software funds or the true value guys have pretty rough looking returns.
Software PE just feels structurally difficult right now. Firms still need to deploy huge amounts of capital but there are very few, if any, scaled software businesses with real AI tailwinds that are both attractive and reasonably priced. It feels like firms are either buying lower quality “misunderstood” assets or companies facing real AI disruption risk.
Then you add leverage, 5-7 year hold periods, and a market that’s actively compressing software moats and margins through AI. Hard to see how the next buyer pays anything close to what PE firms will underwrite unless they get lucky with an AI tailwind company at a cheap price.
For people in software PE or considering the switch, how are you thinking about this market? Does it make more sense to move toward VC or publics and invest in the disruptors instead?
Based on the most helpful WSO content, the software private equity (PE) space is indeed facing structural challenges right now. Here's a breakdown of the key issues and considerations:
Performance Struggles Across Major Players:
Structural Challenges in Software PE:
Shift in Investment Focus:
Current Strategies in Software PE:
For those in software PE or considering a switch, it’s crucial to weigh the risks of staying in a structurally difficult market against the opportunities in VC or public markets. The decision will depend on your risk tolerance, career goals, and interest in earlier-stage innovation versus more stable, transaction-oriented roles.
Sources: Public Perception of Private Equity: A Discussion, Which investing strategy will be most challenged this decade (‘20 through ‘29)?, Does it make sense to go from software CD->traditional PE if my end goal is software PE?, PE recruiting technical questions (software specific), A Guide on How to Navigate On-Cycle PE Recruiting
I think the multiple compression basically makes anyone that invested to be in the red
It’s what the guy said above about the multiple compression. Relatedly at this stage, the antagonism towards the sector means that even if you are very convinced that you own a top quality software asset, you would be dumb to sell or mark to market at today’s valuation if you own a top asset.
Unfortunately software as a whole has become very unattractive, which means everyone needs to wait for a few years before it’s clear what is a good asset and what isn’t. The good assets, however, will still be highly valuable (or even more valuable) in the future.
Coming from a software operator side, I’d like to point out that software is not attractive anymore primarily because writing code is not the bottleneck anymore. But the true moat is data, regulation, brand & proprietary distribution, and results. The industry has been moving to outcome-based pricing for a while, but now we expect it. This means that instead of a software company providing you with tools (which, if you think about it, still makes you do all the work yourself), we’re now expecting they’ll provide us with the end result.
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