Sal Piscopo, the Founder and Managing Director of Ether Advisory Partners, sheds light on the recent trends in the private equity world, specifically in the software and technology sectors. According to Crunchbase, valuations in the software sector peaked in 2021 with a decline in the number of deals amongst the largest PE firms in the past two years. Business owners are holding firm and focusing on growing their businesses rather than taking on a PE partner through a majority LBO, with a focus on achieving higher valuations in the future.
On the PE front, there is still ample capital to be deployed, but the current market dynamics are leading to a focus on add-ons rather than platform investments. Deal flow has slowed on the platform front while add-on deal flow has increased, with over 80% of deals closed in the sector since 2020 being add-ons. Several large technology-focused PE firms have raised funds to invest in smaller businesses, including lower middle market and growth-stage companies, in an effort to capture the potential of smaller platforms.
Many PE firms are focusing on add-ons in 2024, consolidating markets through strategic acquisitions at reasonable valuations. Market exits are being postponed, with fewer planned go-to-market processes on the sell side. Corporate carve outs of non-core assets are attracting prospective acquirers, with strategics willing to pay a premium for the right businesses. PE clients are selling off divisions or technologies to boost EBITDA and potentially increase valuations of their platforms in the future.
The PE fundraising landscape saw significant activity in 2021, with nearly 1,500 funds raised, creating a surplus of financing available for fewer deals. PE firms are facing challenges in deploying their dry powder and navigating a complex environment of changing fund strategies. Proprietary deals are becoming rare and established firms with a track record of success are more attractive to business owners. PE firms will need to focus on making smart add-ons and strengthening their platforms to maximize returns when the market rebounds.
Small software and tech firms are finding opportunities to merge with existing PE-owned platforms, although these deals are not receiving as much attention as larger corporate transactions and IPOs. The future of the PE market remains uncertain, with firms facing the challenge of acquiring businesses at good value, growing them, and securing a profitable exit in a changing market landscape. Investors are hopeful that they have backed the right firms that will succeed in these challenging times.
