While private equity dealmaking has slowed down so far in 2017, the software sector has been resilient to the lull in activity overall, according to a new report by PitchBook and Merrill Corporation.
In the third quarter, PE firms invested $163.4 billion across 959 deals in the U.S., bringing 2017’s year-to-date totals to $401.7 billion in deal value across 2,820 transactions. Despite record fundraising rounds for startups, deal volume this year is down 11% alongside the first three quarters of 2016. Given PE firms “are sitting on $555.6 billion of dry powder,” analysts suggest that it’s surprising to see a pullback in PE dealmaking. They highlight a few factors thwarting activity including stubbornly high prices and limited acquisition targets. Researchers note that add-ons continue to be a key strategy in the currently high-priced environment, comprising 64% of buyouts YTD as they generally involve smaller companies and transact at lower price multiples.
Merrill Corporation Senior Director Richard A. Martin suggests that PE activity has overall propped up technology M&A by volume, “as more fund manager look to up their portfolio exposure to potentially faster-growing technology businesses, even if they have to be purchased at higher prices.” PE’s booming interest in tech has been driven by the maturation of certain segments that “fall neatly into PE investment theses,” suggests Martin, who highlights SaaS-model software companies as a hot target space.
PE deals in the software sector through Q3 amounted to 345 and totaled $39.5 billion, up 3% and 7% respectively over last year. Software deals now account for 68.3% of deals completed in the IT sector, itself garnering nearly a fifth of PE deal flow. The report attributes the surge in software deals to a “flurry of tech-focused PE funds closing as of late,” highlighting new funds from firms such as KKR, Silver Lake, Vista Equity Partners and Thoma Bravo.