As private equity activity in the U.S. has slackened, every sector has experienced a decline in overall volume of investments, barring one. Only information technology is seeing a rate of PE dealmaking comparable to that of last year, with 261 closed transactions through the first half of 2016.
Software is pervading every industry—some already view every company as a technology company, and, in a way, they aren’t wrong (although it would be more accurate to dub every company as "technology-enabled"). What’s helping drive IT’s overall resilience, however, is the relative attraction of software businesses, among other of the sector’s segments, as competition remains intense and quality targets few in more traditional areas of PE focus, incentivizing investors to diversify.
Long-time IT investors such as Thoma Bravo or Vista Equity Partners remain most notable among the cadre of active PE firms; looking at their recent high-profile investments helps shed light on what PE investors find alluring in software businesses. For example, Vista’s purchase of Solera, a company that develops risk and asset management software for automotive and property marketplaces, illustrates the natural entry point for PE firms when a given market has already undergone considerable consolidation.
Granted, firms with operational expertise and deep resources such as Vista are best placed for that particular scenario, while those focused on the middle market can target consolidation through add-ons to extant platforms as a driving strategy, much as Marlin Equity Partners has with its Changepoint acquisitions.