Software PE - deal count going forward?
Do folks expect deal count to decline in software in the next 1/3/5 years? How do you guys think about it? What about fund counts? Will there be zombie firms?
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I think software PE is absolutely cooked tbh. Curious to see how the TBs, Vista, Hgs, etc. come out of this. But who is going to buy their crappy private ERP software assets if even the public market poster childs get sold off like crazy.
Do you think PE funds can just pick by investing in AI companies? Thanks!
That's VC land. Any revenue generating AI company is currently trading at 50x sales. Good luck getting the LBO math to work on that.
Think traditional software investors need to pivot to more niche vertical side, like HC IT or Insurance tech / payment, analytical app, etc. Challenge is how they compete w firms that have been doing it long term like FP or Nordic is the true question. Feel sad for the ppl in TB or Vista or pure software funds
This feels like way too broad a generalization, and some of the views particularly the payment / analytical apps point is just wrong.
Yes, some legacy software companies will absolutely get displaced by AI-native entrants, that’s inevitable. But historically, every major tech shift has produced both disruption and incumbent winners. We’re in the first inning of AI. The application layer is barely built out, and category formation will play out over the next 10–20 years.
Incumbent systems-of-record businesses aren’t defenseless. They sit on massive data that LLM's don't have access to, deep embedding into workflows, and distribution into entrenched customer bases. If they adapt quickly and integrate AI into their core product, their moat can be monetized and even strengthened. What likely compresses is the ability to drive NRR through incremental add-on widgets, customers can increasingly build lightweight AI tools in-house on top of core systems via APIs instead of paying for every new module. The base system of record may stay sticky, but the easy upsell-driven expansion playbook gets structurally harder.
Also strongly disagree on payments and analytics being “safe.”, those are some of the sectors most likely to be commoditized with AI. Payments gets compressed as AI lowers switching costs, optimizes routing, and commoditizes processing. Analytics is even more exposed: if AI can generate insights directly from raw data, traditional dashboard/reporting layers lose value fast.
Thoughts from an admittedly biased software investor:
The purists are going to be ok. It'll be harder for sure (especially in the short-term), but software as an industry isn't going anywhere so you can ignore the FUD. The software tourists on the other hand i.e. folks who jumped in over the last ~5-10yrs because it was a hot sector and are the JAMMBO equivalent (undifferentiated, entirely dependent on multiple expansion, no deep sector expertise) are going to be slaughtered like pigs. Deal count will likely decline because the underlying thought process for underwriting NRR has changed. You will see a shift from seat-based to usage-based/value-driven pricing and retention will only be reliable coming from core workflow, infrastructure, and vertical-specific applications. There is going to be a massive reckoning for businesses that have been built around what are more or less point solutions because systems of record will be able to use AI to more effectively build out new product offerings in a timely manner and match feature parity.
Good take and nice to see someone other than the ASO1 commenting on a thread (comments on everything… very low value add). It’s annoying.
Have you ever actually seen a company successfully shift from seat based to value/outcome based pricing? We tried it at a portco after we bought a small add-on that was outcome based… tried to sell just that feature on OB to a seat-based existing customer base. It did not work.
Brett Taylor didn't even believe it could be done at Salesforce so he left and started his own startup. If the best operator in the last 20 years doesn't believe its doable at legacy providers, what chance does the average PE backed SaaS have?
Aren't existing funds kind of screwed given the de-rating we have seen in public markets + likelihood that generalists likely won't be buying many software assets any more? Seems like marks and exits are both going to be down meaningfully given what we have seen in public markets over the last few months
Yes but egos are massive. Say you recently pivoted to Tech in last 5-10 years. Appointed a senior partners who has dabble in tech or related end-market to head tech at your firm to run it. He tries to ramp.
Does OK / below average pre-covid… deploys a ton of capital during COVID. All of those investments look rough internally but you need to fundraise and ego detaches you from reality.
You fundraise again and narrative is cautiously optimistic about tech rebound because, in fairness, some of the hyper disruptive AI trends have accelerated very recently.
You can’t exactly push out a very senior parter / shut down an entire vertical. Too much at stake. You told everyone it was fine, right?
Long way of saying: you’ll keep trying to do tech deals until you can’t raise any more money… the tide is going out but not everyone notices at the same time. LPs are usually last.
How are you thinking about exiting current investments given multiples now vs. even last year? I think the point about pricing makes sense, but wondering if you can have wide success in that pricing model when a lot of these software products can have functionalities replicated through using AI to code in-house.
It’s not my call. The senior partners haven’t come to grips with it yet so they are gonna hold. Software tourists - JAMMBO problems.
On how I AM thinking about it WRT to what I can control — carry is worthless despite the whatever “rebound in tech” / “fundamentals remain solid” lines they trot out. I’m recruiting for non-tech investment roles.
Fortunate to have had experience outside of tech, non-senior people that taught me tech before dipping per seniors comment above and great mentors. Got what I needed minus carry realizations (fund level).
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