Sal Piscopo, the Founder and Managing Director of Ether Advisory Partners, has noticed a whirlwind in the private equity world in recent years, especially among acquirers and business owners in the software and technology sectors. Valuations peaked with PE buyers in the software sector in 2021 according to Crunchbase, but the total number of deals among the largest PE firms in the space has been on a downward swing in the past 24 months. Many business owners are holding firm instead of taking on a PE partner through a majority LBO, focusing on growing their businesses to achieve higher valuations in the future.
On the PE front, there is still plenty of capital to be deployed, but the market dynamics have shifted the focus more towards add-ons rather than platform investments. Deal flow has slowed on the platform front over the past two years, while add-on deal flow has increased. Large technology-focused PE firms like Blackstone, KKR, and Thoma Bravo have raised funds to make investments in smaller businesses, including lower middle market and growth-stage companies. Many PE firms are focusing on add-ons for the remainder of 2024, consolidating markets through strategic acquisitions at reasonable valuations.
Amid the competition for funds deployment and an influx of dry powder in the market, PE fund strategy is evolving in complex ways. There is a large amount of financing available for fewer deals, leading to challenges for investors seeking opportunities for capital deployment. Proprietary deals are highly sought after, creating a challenging environment for newer firms with less of a track record to compete. PE firms are focusing on making smart add-ons and strengthening their platforms to maximize returns when the market rebounds.
Prospective acquirers are looking at corporate carve outs of non-core assets, with strategics willing to pay a premium for the right businesses. Some PE clients are selling off divisions or technologies to boost EBITDA and potentially achieve higher valuations for their platforms in the future. The competition for deals is intense, especially for newer firms without a proven track record. Business owners are attracted to firms with a history of success in the hopes of maximizing returns during market recovery.
In conclusion, PE firms are showing their mettle during these challenging times, with a focus on smart add-ons and strengthening platforms for future returns. Small software and tech firms are being viewed as potential important pieces to combine with existing PE-owned platforms, leading to deals getting done, though not as prominently covered as larger corporate transactions and IPOs. The future of the PE market remains uncertain, with a focus on strategic acquisitions, divestitures, and maintaining a competitive edge in deal sourcing and funding. Stay tuned for further developments and shifts in the PE industry.
