As Private Credit is getting decimated in the wake of software Armageddon, want to hear from the folks inside the tech only PE firms (e.g., TB, Vista, FP, SLP, etc.) on how deep underwater the portfolio is?
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Private equity firms focused on tech, such as Thoma Bravo (TB), Vista Equity Partners, Francisco Partners (FP), and Silver Lake Partners (SLP), often face unique challenges during downturns in the software and tech sectors. Based on the most helpful WSO content, here are some insights:
Portfolio Challenges: Tech PE portfolios can face significant stress during a "software Armageddon." Many distressed situations in tech arise from critical product issues or being leapfrogged by competitors. This can lead to underperformance and valuation write-downs.
Operational Adjustments: Firms like TB and Vista are known for their operational expertise. They often focus on improving operational efficiency, such as addressing bloated R&D budgets or inefficient salesforces, to stabilize and enhance portfolio companies.
Valuation Pressures: In a downturn, EBITDA multiples for tech companies can compress significantly. This impacts both the valuation of existing portfolio companies and the ability to exit investments at favorable multiples.
Private Credit Impact: If private credit markets are under pressure, it can exacerbate challenges for tech PE firms. Leveraged buyouts (LBOs) in tech often rely on private credit, and tightening credit conditions can limit refinancing options or increase the cost of debt.
Distressed Opportunities: Some tech PE firms may pivot to distressed investing or light turnarounds. However, this strategy requires careful selection, as many distressed tech companies face fundamental issues that are difficult to resolve.
While the depth of the challenges varies by firm and portfolio, the ability to navigate these headwinds often depends on the firm's operational expertise, sector focus, and access to capital.
Sources: Distressed Tech PE, Ups and Downs | The Daily Peel | 6/23/22, An Overview of Technology Media and Telecom (TMT) - Part 2 of 2, Tension in the Tetons | The Daily Peel | 8/30/22, PE recruiting technical questions (software specific)
No one knows. The only certainty is that this is an inflection point.
No no no bueno muchacho
bump
Very cooked if buyout. Not as much if in real growth equity (Coatue, Dragoneer, etc)
removed
What was the nature of what you were saying, given youre in growth?
We are just a few years away from what will be some of the best software PE deals ever
Please explain, genuinely curious to hear your view.
The LLM bubble is going to pop sometime 2H 2027 - 1Q 2029. This is going to cause a recession. This recession is going to hit software companies hard because they will have already been beaten down by this LLM FUD. So, they will already be starting from an artificially low spot and then get hit with a recession.
Depressed valuations that have basically nothing to do with firm-specific operations makes for some of the best buying opportunities for PE. If you look at the best individual funds and the best individual portcos, they basically all follow this buy/deploy at the low in the cycle and sell/return capital as the cycle flips and hits its stride. The business cycle is a powerful multiplier.
Growth equity VP here.
I don't think anybody's portfolios are truly "underwater" right now unless they were absolute dogshit before. Customers in most industries aren't in a hurry to replace something that they rely on for core business operations with a homebuilt solution... and there would still be a lag even if they did.
Around established businesses in the market I see pretty steady growth in bookings, with the exception of stuff in categories that were always questionable (e.g. horizontal sales ops). I don't expect that to go on forever, but you'll see contraction happen first in true point solutions (e.g. Monday.com, Docusign) way before you see it in the kind of stuff tech PE invests in (ERPs for specific verticals).
To the other poster who said growth would do better than buyout, I disagree. Buyout portcos at least have real cashflow and were usually (but not always) purchased at more sensible values. Speaking from experience, it's tough to pivot a product roadmap when you were already hemorrhaging cash to justify the latest upround.
The two biggest areas AI has made things tough is market "noise" and terminal value:
Dude… what??? Idk how you can point to a $4b and $8b market cap biz as going to feel pain first but that’s okay because PE doesn’t buy point solutions…
Nobody can underwrite multiples but the firms that filled their portfolios with 5-15x revenue multiples aren’t underwater…
Are you still investing in companies at 5x+ revenue multiples? Have you noticed slow down in PE exits?
Just want to point out that PE has definitely bought point solutions; not every pe portco is a vertical ERP
Almost none are vertical ERPs… even less are differentiated vertical ERPs. Just a wild take above.
I'll be the one to say it: I think anyone junior in SaaS with career elasticity should seriously consider pivoting away.
For decades, software (mainly talking about enterprise SaaS), was one of the most attractive business models. High revenue visibility, high switching costs, high margins. At its core, predictability = confidence. If a company achieved product-market fit and strong unit economics, generating alpha was relatively straightforward - professionalize sales and marketing, invest in new products, expand within the install base, etc. If you owned the system of record, you typically had the right to win. When you exited, you were rewarded with a premium multiple because investors understood the playbook, and you gave them predictability.
Right now there are a lot of questions around that foundational assumption - and questions are not confidence are not predictability.
Here's a couple new questions to consider:
"The system of record is a moat, right?"
Interoperability is dissolving this moat, imo. Take healthcare for example. EMRs controlled the clinical record and were able to lock in hospitals because data was hard to move. Fed Policy is cementing interoperability as a mandate now - Microsoft and Google can retrieve clinical data without relying on the EMR as the single source of truth. Patient level and encounter level data is now portable and queryable in real time across systems.
"But we should be safe because the solution is deeply embedded into the workflows?"
Historically, SaaS businesses could lean on domain specific configurations, embedded business logic, etc. all providing complexity that was defensible - but with Claude level models, this advantage is eroding fast. Foundation models can now observe workflows across tools, orchestrate actions across applications, generate net new workflows that never existed in software - in other words, workflows are becoming model native, not app native.
These questions, and many more new ones, are leading to terminal value risk, which others have mentioned in the thread. Traditionally well positioned SaaS businesses were underwritten on models that may have discounted projected growth, churn, margins, etc. but now there's an existential question being priced in too, and even a 5-10% terminal failure probability changes everything.
Exit multiples are terminal value judgements in disguise - how long do we believe this cash flow stream meaningfully exists for?
So you’d suggest anyone in VC, GE or Tech buyout to pivot?
Investing is fundamentally about risk-reward. It's not like the investing firms that are underwriting deals in the year 2026 are not aware of the risks you mentioned. Also insane to say everyone in software should pivot away when it's a sector with large tailwinds. AI disruption is largely a postiive for VC funds, not a negative. For GE, it could also be a positive, especially for the GE firms that take miniority stakes. Think you are painting with far too broad of a brush. Just like any technological advance, there will be winners and losers.
I love this website….. ok, name 5 software GP buy-out deals done in 2026. Harder than you thought to pull that list together? Nobody is saying the investors aren’t aware of the trends… just look at deployment and exits.
Other points: GE is minority stakes by definition. Owning more or less than 50% of the common doesn’t change your exposure to disruption.
VC which has 10-15 year holds is a different discussion. They are chasing moonshots (IYKYK) during a greatest period of disruption ever… would expect them to be active. That’s the entire industry.
Think your falling for survivorship bias on growth equity raises.
I don't agree with everything here, but generally agree that investing is not the place to be in if you want to be in SaaS in the long-term. Everyone in SaaS banking and investing should go work at an AI start-up. Much higher returns than any PE career unless you start your own fund. I think there's still benefit to a 2-year PE/GE program to get an overview on the industry, but it does push back your entry into the more innovative part of the economy.
Jesus I lost brain cells reading this
Are you moving to an AI startup then?
You should refrain from giving any sort of career advice if your take is to drop an entire sector from private investing because of a sudden sentiment shift and instead pursue high-flying AI startups despite half the deals done in the past 2 years immediately imploding once foundation models added those capabilities to their roadmaps. Whiplash sentiment changes like the one happening to software are almost never right and more often overly bearish in their expectations.
Curious, what sector are you focused on?
I've spent most of my career in SaaS investing and agree these are the key questions being grappled with.
Curious on the interoperability front- where are microsoft and google getting this data without EMRs/what fed policy are you referencing? I spend some time in HCIT and even the "AI-native" startups mainly plug into core EMRs.
Unrelated to your question, but curious if you’re planning on staying in SaaS investing or what the ideal pivot may be?
Your point on interoperability is interesting because in some industrial / infra cases, that matters. Looks like a new sector has regulation finally understanding and catching up, which removes a lot of the moats?
Current MFPE investor. The buyout tech team where I work is extremely cooked, encroaching "DOA". Capital was overdeployed during FY20-22 during peak SaaSCo valuation multiples, and none of the businesses really recovered from 8-10x NTM ARR businesses re-rating to 3-4x ARR, implying >50% value degregation purely from perceived terminal value reduction. Strawman argument, but illustratively if the businesses grew 10-15% REV and EBITDA at 20% CAGR over a ~5YR period, this still might not bridge to initial cost basis given multiple headwind
Perhaps most accentuated - there are a handful of portfolio assets where growth has slowed and NDR / GDR declined to extent EBITDA is growing closer to 10-15% CAGR, which can't fundamentally support a healthy exit factoring in limited LFCF (%) yield and collapsed valuation multiples
The MFPE firm I work at isn't exclusively tech - so portfolio returns should be fine - but there is tremendous "damage" within tech portfolio that has not been appropriately marked
No one geninuely knows the extent of AI disintermediation risk within SaaSCos. A simple heuristic would be transition from on-prem to cloud computing, as still a tremendous amount of business is run on-prem.
Taking a stance on AI portfolio impact in reality forces one to make a call on AI model capabilities over next 3-5YR window. There is an AGI / ASI world [within coding context] that software layer is mostly commoditized, as perhaps AI agents can compile (i) "perfect" code architecture, (ii) run any ticket updates, (iii) ensure cybersecurity compliance etc. Now this likely is not the case which unfolds across future.... But helps provide range between status quo today, where SaaS is fine, and SaaSCo Armageddon
This
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