Software PE - public markets bloodbath
Public market investor here, seeing a bloodbath in saas - even companies with great earnings are getting hit hard (e.g. Servicenow 30% YTD and 50% over last year)
curious how your firms (if PE) are (a) seeing fundamentals - bookings, billings, expansion rates and any impact either + or - from AI and (b) are you changing your underwriting (exit mults, IRR threshold) or portfolio valuations based on the public changes?
No, because public markets and private markets are unrelated.
Sure…. Until you need to exit or for the next quarter LPs report where you need to justify your mark methods
Wut? lmao
sarcasm?
Found the guy who is marking my fund’s portfolio
Must be nice not being at a tech fund; we are re-underwriting everything for pushed back exits and lower multiples. Fund is going to be fine largely because some of the portco's are adopting AI (and more importantly seeing attach rates for AI products) much quicker than anticpated, but without that a lot of software funds would be pretty screwed.
You delivered this point without nuance which is why people are trying to dunk on you. But, there is definitely a segment of the market, likely below $300M TEV, where the next exit is going to be to a sponsor or PE-backed strategic and public valuations are ~somewhat decoupled from your outcomes. As you move upmarket this is much less the case, as your buyers’ WTP will depend on their valuations and ability to raise financing.
This is accurate
This is only true to a very small extent
Broader concerns that public market investors have regarding the sector don't suddenly disappear when it comes to private companies at smaller scale
Sub-$300M TEV private SaaS capital is probably what? 50bps of PE assets? Sure its true, it's just not relevant.
Think entire software investing market is seeing bifurcation where the generalist guys who don't have any real expertise in the space are getting killed. Even some firms with SW expertise like STG and Clearlake are getting killed; generally really hard time to be a value software investor right now and over the past few years. A lot of the businesses the value guys buy are only avaliable at those multiples because they don't have much of an moat against competition and those are the verticals where the market today beleives / is most likely that an AI-first product will fundamentally disrupt it. Less likely for an AI-first company to disrupt the unstructured data or security software market vs. something like a marketing tool or customer support software.
Fundamentally if you can turn a rule-of 20 company to a rule of 40 or rule of 50 company; you will continue making money. Lots of currently public companies that could benefit from being private and turning their product moat into a stronger financial profile away from the short-termism of the public markets. This is where the Vista's has historically lived and have done very well at even if these businesses trade at high multiples relative to other industries (even now post the downturn).
Problem with the take private thesis is that you actually need engineering and product talent to ride this platform shift and integrate AI in a competitive way.
This is more than just adding a chatbot to your UI, this often requires fundamental changes to your data model and architecture, and also your company culture and how your teams work. Software PE historically has not been good at this.. they are good at offshoring, operationalizing, optimizing etc.. they are not good at new product development and innovation. I am not sure if MNDY (or name your beaten down SaaS) being taken private by Vista for example is going to emerge stronger out the other side when 'strength' requires innovation vs optimization.
I really do not think that's right. A lot of PE shops actually scale up not down R&D and product development investment in the first few year's. It's far less unstructred though and there is a lot of admin involved in terms of pipeline buliding than non-PE names; which might slow down pace of innovation. PE is not VC, but I don't think it's accurate to say all PE does is about the cost-side of things; lots of effort is put into growing revenue and especially around product. Also innovation that's required is not just product but business model for a lot of businesses where the problem is that seat-based pricing is just getting clobbered by the AI-related headcount reductions.
Completely disagree. As a vista LP…
Putting up high margins and low single digit growth (with questionable terminal value due to commoditization risk) = 6-7x EBITDA business. Cant pay a control premium and exit at those multiples and generate good return. LSD growth = 9-10x at best and still math won’t work.
Public markets, especially large cap publics in the US which is the deepest most liquid mkt of all time globally, rarely become fully detached from fundamentals. So rarely that most public mkt fundamental investors rarely outperform.
The wisdom of the crowds is usually much smarter than the wisdom of tax evader Robert Smith or woke-left Jose Feliciano or Orlando Bravo. In any case, I see so many people claiming software cheap, but no one, not a single one, is putting half their personal account into IGV. Why?. And Why are we not seeing any insider buying from large public software companies? Why hasn’t there been a big software take private for the last 6 months? Why did Thoma do 3 dvd recaps in 2H 25 to take chips off table? And why are we seeing everyone in the private equity / credit space making such spirited rebuttals on the software correction — is it because they are incentivized to or because they truly believe so?
See sailpoint which has traded terribly since IPO, see Solera not IPOing, see the fact that all of Clearlake’s companies in the entire sector are not growing but are doing 40%+ margin.
PE software if f’d. Low growth / no growth, AI competition at low end, hyperscaler/big public co/VC backed guys at high end. Lower terminal values across board.
Let me ask you PE guys this: would you buy Vista or Thoma last fund at nav or, CRM/ADBE/SAP at ~10x EBITDA or less?
Finally someone gets it. This is the best take on this thread. Software is fucked. All these PE funds that took software companies private few years ago, are all sitting on mega losses now. These multiples just arent coming back and the moats are broken. What do you even do as a software PE investor now? Can you imagine being a guy at Fidelity doing long only investing in software? Yeah it’s as fucked as that
How are Vista's LPs reacting to this selloff and also what's been the receptivity to Robert Smith's nonstop marketing on CNBC?
I left a comment elsewhere in this discussion that's related to this question.
I mean this will full offense intended as this forum has become overrun with charlatan's. You sound like a public markets guy who has found himself a private markets tourist. Perhaps dabbled in FoF with only funds who are household names vs doing real work and finding managers truly capable of generating any Alpha (often far down market). I have been doing this for over a decade and been a tourist for roughly twice that having watched the fallout of the dotcom burst. To answer your question, no, but to add very important context, I would not have invested in any fund from those managers past a 2018 vintage.
Very curious about this as well. How are vertical specific SaaS companies doing ? Firms like SGE's, BPC's, and mainsails. I feel like even these guys have to start investing in AI or they are doomed.
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It feels like unless you have a specific moat as a vertical company like data or extreme customer stickiness - you’re doomed as a vertical software. Or not. How about horizontal too, guys like Workday?
Horizontal is just more likely to be disrupted than infra / security / vertical. The more specalized your offering the more of a moat around being best-of-breed you have. Even if AI enters the complex world of cyber; it's very hard to win inital customers and bulid the flywheel of trust and/or flywheel of data.
You’re clearly behind the curve. Anthropic is hiring cybersecurity engineers to train agents.
The fact that there are 1000+ cybersecurity companies tells you mkt is saturated. Many shrinking / losing mkt share (see Clearlake portfolio). Many stagnant. Some growing but those generally in the public mkts or VC side of things.
I think data mgmt, infra, system of record stufff better at margin but all are 6-10x businesses now. TMT has seen this before, see broadcasters.
From what I’m seeing, most PE shops still feel okay about fundamentals (bookings quality, net retention, mission-critical SaaS), but there’s definitely more scrutiny on growth durability vs. AI “noise.” AI is helping some products expand faster, but it’s also compressing pricing power in others.
Underwriting has clearly adjusted though lower exit multiples, more conservative multiple expansion assumptions, and higher focus on cash flow / path to profitability. IRR targets haven’t really moved, but getting there now relies more on ops and less on multiple lift. Public comps are definitely influencing portfolio marks, even if with a lag.
I think what matters in the fundamentals has changed; the durability vs. AI noise importance has meant that gross is far far more important than net retention when evaluating businesses.
Public and private aren’t fully decoupled, but the linkage depends on where you sit in the market.
At the low end, sub-$300m TEV, sponsor-to-sponsor or strategic exits still clear off cash flow and leverage, so public SaaS multiples matter less in the short run. Upmarket, it’s a different story. Buyer WTP is constrained by their own marks, financing, and exit optionality.
Big difference this cycle is that multiple expansion isn’t a plan anymore. Entry price and real value creation actually matter again!
Tech debt is now a lot worse than it used to be. If your product and workflows were not built to be AI first, it's much more difficult to move at the speed that AI-native software companies move.
Even a lot of org structures no longer make sense.
We're not even that deep into AI, and this will simply become exponentially worse for legacy companies.
is there an argument that vibe coding makes it easier to update your code esp if legacy? or incumbents have win advantage?
Not sure how much software you have built so apologies if this comes across as simplistic but it's like trying to turn a company that was running on paper systems into using computers. You kind of have to rip a lot of guts out, and a good chunk of those guts were useless.
Absolutely agree; agility is just as important for legacy names as any kind of AI moat. Just like any other revolution, some legacy names will end massive winners and others massive losers. Real question really lies in which company ends up where. Right now, the public equity and debt markets is marking companies as gulity until proven innocent; very classic sell-off. I don't think there's any real chance a Salesforce gets completely replaced by an AI-first company; much more likely it uses agents and AI to grow it's revenue / value-prop to customers.
The tech debt of some legacy enterprises is insane; one of the key areas of dilligence any PE worth their salt should do alongisde broader organizational agility to adapting new tech. Another big pit fall is that PE often acquire tech in a different code-base making it hard to integrate. Key areas of dilligence for any tech shop worth their weight and a marker of differentiation against the generalist players. The age of randomly stiching up software businesses at different multiples and selling it ala. PSG (they might still have a sourcing edge relative to peers, but really bearish on them as a firm) is over.
The types of software where you're not a system of record and just relying on consultants building your customs workflow solutions are probably right to be getting fucked.
If you're a legacy tech vendor losing share to modern cloud-based solutions the clock is ticking faster.
If you're the modern, system of record vendor then AI will be a net benefit for you to cross-sell into your user-base.
That's basically the consensus view and so it's hard to paint all of SaaS unilaterally, though I think rigorous tech DD will become even more important going forward for all private markets investors.
What reactions are people seeing with their ICs? We’re going pens down on a lot of processes as we work through what this all means and trying to pivot to other sectors
Many users mentioned system of record businesses being important. What kinds of software companies are a system of record in vertical or horizontal SaaS?
Would workday be a system of record given all the data? But would imagine they would get disrupted as the software is not good
What about for vertical SaaS players in their niches?
It just means the software stores and/or collects data used to make decisions + has some level of adoption by workforce / integrated into other workflows. It’s in every CIM ever made and is a real concept but is a buzzword now like “mission critical” or “sticky.” Yes on your questions and too many to name in vertical. Most of the comments pointing to system of record as a magical barrier are from people that don’t fully grasp how f’d software is now. These businesses were bought for 15x-30x EBITDA (some on rev multiples!) Strength of product as barrier is weakening, burden of implanting new systems is weakening, cost to enter market is declining so downward pressure on pricing, etc. As others have said, I think multiples for these biz will trend towards 10x EBITDA over the next couple years. Bloodbath for investors that bought in last 5 years.
The challenge in these software PE-backed companies isn't the decision to invest in R&D vs. not or even the underwriting - I view all of those capabilities as largely commoditized. The metrics of software financial performance and valuation are so standardized at this point.
The actual challenge is managing a levered business when growth is slowing or when your big bets don't pan out. You can have a great tech leadership team -- although let's face it, there is a huge talent dropoff in PE -- but if you start to see more churn than growth / upsell you will end up having to take out cost (people) and begin to death spiral. There are so few examples I've seen of businesses that have been through cycles of cost cuts and rescue financing that actually correct and return to growth. I think this is happening from the largest and most levered players all the way down to the lower middle market.
The worst part is that the lenders will be stuck - are they going to take over a failing SaaS business and fire sale their way to solvency? The market for those companies is going to be incredibly challenged with low valuations or flat out unwillingness to buy.
It's a scary time for those of us who have bet our careers on software.
Yup nailed it. I have seen this play out as well when I was in PE - the death spiral is very real.. which is why value software investing is so difficult.
Public software companies don't want to pay out the nose w/ SBC but tech (and esp growth) is a talent game and its seen as the best tool to retain talent. Calls into question the financial model of scaled software itself (where talent has that much leverage, and it's so damn competitive) if all your FCF needs to be spent on SBC to keep your talent from leaving.
You should pivot dude. Software PE is absolutely dead, no ifs and buts about it. Sentiment is poor right now, but wait until it manifests into reality
Just look at Chegg...fundamentals looked ok for a while even as the stock was cut by 60%...then it was death by a thousand cuts and the biz faced accelerating declines.
PE liquidity is awful already in terms of distributions, it's only going to accelerate with this. Glhf
I see a somewhat related issue which I don’t see people talking much about. I think we’re only going to see bigger supply / demand issues as traditional software PE has been consolidating the market for years. And it’s been such an attractive segment historically that there is so much dry powder chasing a declining number of assets. The incremental new start up will be AI native rather traditional cloud and it’s going to take PE a while to get comfortable with buying businesses this nascent and unproven. My view is that you’ll see a barbell where VC / GE will see a boon and either invest in these growing aI native companies or contribute in late stage deals to the AI infrastructure build out. Mid market through to larger cap PE will see deployment issues in this segment
PE software is dead long term. That’s it
90% of it is LSD top line growth companies with really crappy legacy tech stacks, mediocre mgmt teams, and massively overpriced. Also nights at relatively high multiples (with expectation of operational improvements). AI natives will absolutely destroy exit multiples
I feel sorry for those who have built their careers on software investing broadly. The jig is up here
Probably of all the software companies out there today, only 10% will survive with at least LSD growth. Only less than 5% that will thrive. Good luck picking up these needles in the haystack
which means the private credit concerns should be very real, most BDCs are 20-50% tech lending to businesses with zero hard assets they can recoup, meaning recovery rates will be nil. Said it for years that direct lending to software businesses was a moronic play, but BDCs did it because they got a tiny equity warrant to boost upside (when things were good). going to be a giant mess in PC given sheer volume of lending to zombie software businesses
Makes sense why someone from Asset Management - Equities would make broad high-level, dogmatic statements that lack any nuance. Where do you get your 5% from? Where do you get your 10% from? You’ve been against software for years for not having hard assets? What about a high retention, growing install base that generates recurring revenue? Is AI going to rip out payments? Is AI going to rip out airplane routing software? What do you think about deterministic software vs probabilistic agents? You’re a level 1 thinker.
I've heard the word AI more times than I can count in the last week- my only thought is how many people on my IC have actually used Claude or ChatGPT in any real capacity?
The world is changing fast but not that fast. Chatgpt can't even format the bullets to my notes correctly. Legacy SaaS will have to adapt but ultimately they will use AI to provide more value to companies and automate more human labor away.
SaaS tends towards oligopoly because good engineering is expensive (before you say AI is driving this to zero keep in mind offshoring has been around for decades) and companies share certain workflows where it's optimal to have a small handful of companies developing solutions to address those workflows.
There's obviously nuance to this but to say all SaaS is dead is fear-mongering and is reminiscent of just a year ago when people said Chatgpt and Perplexity will kill Google.
Google will survive and thrive because they hid their strengths until the FTC was resolved. They weren’t actually behind
Bad example
That sounds like rewriting history. The transformer was literally invented at Google, I don't know what part of their strengths in AI was hidden. Also the FTC case was regarding Chrome where you could argue there are second-order effects if a spinoff was forced but hardly relevant to the core narrative that everyone will be using AI to do search.
And this is why PE is going to die. Work at a top SM fund. Most of us here are 30-60 yrs old.
Fund head always playing w AI. Entire work flows have been set up for us. Same at all other top funds I know of.
PE is unsurprisingly behind the curve.
What kinds of workflows? Genuinely curious
And is your AI workflow just using a chatbot interface
Datalake with all our private / paid data. MCP connected to various systems (Bloomberg etc). APIs that connect to any data rooms for our credit team and private growth team. Entire Alphasights library that is purchased, whole glg library, tegus transcripts, all in data lake, plus sell side research. All also linked to various open source models and Claude. Can easily leverage in Claude Excel or PPT.
Let me guess - you use the free version of ChatGPT and think it's indicative of the frontier LLM models?
Look at the difference between Claude's Opus 4.6 vs. the best frontier model from a year ago. Talk to any software engineer at a forward-thinking tech company and let them tell you that a year ago they spent more time correcting the AI than they would have spent actually coding themselves... and today, they are 5x or 10x productive with current tools. Look at how many breakthrough tools get released each week in 2026 from Anthropic, OpenAI, Perplexity, Google, etc. Rate of acceleration says everything. I'm less concerned with the rate of adoption because it's not very forgiving... you will either learn to the adopt the tools, you will get fired, or your group will get beat by competitors.
I talked to my old PE coworkers, and they didn't even know what an agent was. I'm really not trying to fearmonger, but your groups/companies are going to get eaten up if you fall behind in the next 5 years
Do people think bankers covering software will continue to do well? It’s historically been a huge fee pool.
Sure, if they can offer restructuring as well.
Buldge brackets can’t do rx. Don’t you think there will be a bunch of M&A?
What does this dynamic mean for PE writ large?
Software has been the largest deployment sector for the entire industry (difficult to decouple SaaS and PE). If liquidity from that channel is likely dry and investors are left sitting on companies that have re-rated meaningfully lower, difficult to imagine allocator views of the entire PE industry not changing.
At some point, if the future of PE isn’t software or professional services because of disruption risk and there’s a push away from pure the financial engineering nonsense towards real operations value creation, it seems like there is only at a tiny subset of sponsors and investment professionals that are positioned well to succeed long term. Really bleak outlook to be young in this space.
As an LP I've thought this for years. The most repeatable PE managers are those who can actually run/operate a business. The finance/modeling/whatever is generally commoditized and zero firms have an edge here at all. You have to either be a pure sector specialist, a former operator turned PE investor or be focused on special sits/carve-outs/etc. It's impossible to aggregate into buckets but talking to hundreds and hundreds of funds over the years and there are only a very small subset that fit the above, the remaining are purely financial engineers that will die a slow death. PE has needed to shrink in terms of AUM and head count for 10+ years and it'll happen over the next 10.
can you share any names that stand out in the tech PE space?
From my perspective, very difficult to discern the wheat from the chaff when looking at PE managers until things start breaking. The managing partners at these firms are world class marketers with asymmetrical information advantages over LPs / prospective employees
Time will be the true test of how this shakeout, but to your point, it could take 10 years. People could chew up 10 years of their life (not just their careers) toiling someone else’s soil to realize once it’s too late to pivot that they ended up at one of the losers.
No bueno!
n/a
This has always been my question and there is no good answer because we haven't hit a blowup phase yet for these companies. PC and PE investors both cling to ARR due to contracts but those contracts are infinite in nature...There are no assets to claim in the case of a bankruptcy and loss ratios will reflect that over time.
The moat in software is obviously dead at some point in the future. Going to need to offer much more than legacy workflow architecture to survive. This is not going to happen overnight. But the whole industry was essentially built on man hours of extremely expensive dev resources.
Are there any private credit guys out there that could chime in with their perspectives? With the Blue Owl headlines, seems like this may have jumped from an equity story to a credit markets issue which is a big deal.
Listening to the TB and Vista talk tracks, It feels like the equity story for software is tough but there is still an intact narrative if you squint hard enough. Incumbents have customer relationships / deeply embedded workflows / vertical expertise / non-technical moats etc. While that may be enough for world-class and confident equity investors to view legacy software as investible, I can't imagine it works for credit investors.
The dispersion of outcomes doesn't work if you are at best getting a 8-12% cash yield but may very well end up in an impairment scenario if AI disruption looks possible in the next 5-10 years (hard to imagine there isn't some disruption over that time period). If credit investors believe this and tighten, multiples for SaaS businesses would have to go lower to make IRR math pencil, regardless if PE investors believe in the equity story.
It just keeps looking uglier and uglier.
The issue didn’t jump from equity to credit. SW PE is in a tough spot, the most aggressive lenders to SW PE deals are in a tougher spot. Normally this is not the case, except that private credit uses 60-70% back leverage on fund to deliver returns so even low loss rates are bad, private credit gives loans to companies that don’t generate enough cash to pay down the principal so they rely on ponzi finance which may not work if next lender expects a similar equity cushion but the V in LTV is dramatically lower, and Blue Owl did about the worst thing you could do when facing a duration mismatch by selling loans to themselves & then pretending that it wasn’t a big deal. They likely sold the top tranches of an ABS to external parties and shoved the risk tranche to Kuvare which is like if Lehman started buying MBS back from clients to pretend like there were no issues in 2007.
The guys who run Blue Owl have blown up before, they are not serious people. It’s no different than what Tiger Global was doing in 2021 VC except that venture returns allow for high loss rates. Credit does not.
It doesn’t matter if it takes a decade for SW to actually disappear. Look at what happened to newspapers after dot com, tobacco after the MSA, etc. The multiples take a very long time to recover. PE & PC do not have the ability to wait that long to return capital especially given how slow capital returns have been already in the last few years.
The PE / PC industry has too many people in it. You can’t throw a pebble down Hudson St without hitting some guy who says he works in PE / PC. That’s a telltale sign the industry is structurally cooked, when some very mediocre people sleepwalk into careers in the industry. The industry will shrink.
thanks for great discussion - appreciate all the perspectives
Another brutal day…
Just an RE guy but keep tabs on PE threads.. thread is pretty scary. If private credit cracks because of this feels like private investment flows are fucked for nearly a decade (including what’s happened since 2022). Tough to see that you all are this bearish on one of the most profitable sectors of our economy, was wondering if public market was oversold.
I’ve seen the same trend. Even strong SaaS names are getting hit hard, which is making exit multiples more conservative. For PE, we’re paying closer attention to net retention, expansion rates, and bookings quality. AI tailwinds are interesting but often not fully reflected in valuations yet.
What is the path of action for analysts who signed software PE offers 1-2 years ago? Is it better to stay in IB at this point and roll the dice again on exiting, or use the ASO year for learning experience try to lateral to non-tech PE or growth / VC?
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