As owner-managed software businesses explore their first private equity round, PE funds need to find meaningful ways to differentiate themselves to win their trust and partnership.
Adjust to new software pricing models ahead of the pack
As the software market continues to evolve, accelerated by the impact of AI, so do software and SaaS pricing models: “per seat” based pricing will increasingly give way to usage or outcome-based pricing models. Those funds that can most quickly adjust their QofE lenses (and bring their ICs along with them) beyond “traditional” non-variable MRR are likely to win the greatest share of the next-gen high-growth software businesses.
Unearth an M&A pipeline of valuable IP in distressed businesses
As cash runways and follow-on investment rounds for cash-burn businesses continue to dry up, we're anticipating an acceleration in the number of interesting, but ultimately non-commercially viable, software businesses coming into distress in 2025. This opens up the potential for valuable and accretive software IP to be picked up on the cheap. Huge value, therefore, to thriving software businesses in picking a PE partner with the resources dedicated to unearthing those gems.
As the software market continues to evolve, accelerated by the impact of AI, so do software and SaaS pricing models
Demonstrate a track record of unlocking strategic partnerships to expand internationally
It's no secret that organic growth across UK software softened through 2024. This has put an even bigger emphasis on international expansion as a growth lever. But balancing this strategy with a continued focus on capital efficiency and cash generation has limited owner-managers' appetite to launch internationally with a direct sales force. Strategic reseller partnerships are a preferred route in the current cycle. So demonstrating success across your portfolio by expanding internationally via partnership is seen as a huge tick in the box for investees.
Greater appetite for minority structures
Given the softness in organic growth, many owner-managers are hesitant to give away large chunks of equity in what they perhaps perceive to be an equivalently “soft market” from a valuation perspective, though our experience continues to point towards sustained high valuations for top quartile assets. This contributes to a greater appetite for minority structures that preserve more equity for founders but still allow them to benefit from the advantages of PE investment, such as de-risking, strategic support, management transition and many more. Those funds able to deliver more flexible and more bespoke structures are therefore proving popular.
Knowledge sharing and best practices across portfolios in respect to AI adoption
It's fair to say everyone is still trying to work out how and where to best make use of AI to enrich their product or operations. And with a lot of investment capital being spent on duplicating efforts across the market, a PE partner that's able to take live and real-world learnings from across its portfolio to benefit its investees is in high demand.
Author
Finn O'Driscoll
Partner
I have over ten years of M&A experience advising high-growth technology businesses, founders, management teams, and corporate investors. I lead Clearwater’s software practice and am passionate about contributing to the continued growth and development of the European software industry alongside the talented team here at Clearwater. I also have extensive transaction experience across other technology verticals including IT Managed Services, Digital Transformation, B2B Data, and Information Services. I have transacted to and for many leading international strategic and private equity investors including Vista Equity Partners, Macquarie Capital, ECI Partners, Inflexion, Bowmark, EMK, Livingbridge, LDC, and Tenzing.
Transactions
Not just numbers on a balance sheet, our transactions represent over 20 years’ commitment to our clients’ future. Helping them change the game. Even before it was ready to be changed.
Investment in a leading intelligent transport systems platform
Adviser to Consat Telematics on its minority investment from Bonnier Capital
Raised financing for a German leading IT-Managed Service Provider (MSP) for medical practices
Adviser to NORD Holding on raising finance for the acquisition of VisionmaxX Group
Ledende iGaming-mediegruppe fortsætter sin rejse i nyt ejerskab
Rådgiver ved majoritetssalget til den eksisterende ledelse
Investment supports scaling of a specialist professional services firm in security‑critical technology
Adviser to Daintta on its investment from LDC