Welcome to our new article series, where we will be sharing valuable insights and perspectives from the forefront of the software and technology transaction landscape. As a leading advisor in the industry, we are constantly engaged in conversations with funds and corporations, attending conferences, and staying on top of market trends.
To kick off this series, we will be reflecting on some key takeaways from the first quarter of 2024 and sharing what was discussed at the 23rd Annual Chicago Booth Private Equity Conference.
Generative Artificial Intelligence
Private equity (PE) has been exploring, researching, and using some form of Generative AI for up to multiple years now. Notable use cases include deal sourcing and due diligence from an investment perspective, and product development and enablement at the portfolio company level. The common theme being that not understanding AI is a liability and a risk as it will play a meaningful role in the advancement of the merger and acquisition (M&A) and PE environment.
Investment focus shifts
There is a reinforcement of healthy appetites for mission-critical software with strong product technology and market fit. Parts of the market have shifted some focus from net retention to an increased emphasis on gross retention rates, partially driven by macroeconomic changes from 2020 to 2022. The pivot away from "growth at all costs" to "the rule of 40" better positions companies to take advantage of rapidly evolving market conditions and better position themselves for the long-term.
Private equity is becoming larger, and more competitive
There are more Limited Partners (LPs) and General Partners (GPs), more capital, more demand, and more privately-held businesses (as being public has become less appealing for various reasons). It's critical to differentiate amongst competitors and demonstrate value creation more than ever now as the days of pure financial engineering plays are behind us. Separately, the debate of industry focused vs. generalist funds was on display; specifically, how traditional software-focused players are seeing more "software tourists" from their generalist counterparts. Can they provide the same level of expertise, insights, and perspectives that drive value creation?
In-house operations teams importance
Multiple leaders spoke to the importance of their in-house operating partners and teams driving value and change within their portfolio companies spanning their investment lifecycle. This is appealing to owners and management teams and serves as a critical way to differentiate from other potential investors. This is typically evident during diligence when looking at key ARR and retention metrics of founder owned vs. S&T PE backed companies.
Proprietary relationships/deals
As is well-known, the private equity ecosystem is very much relationship based. Securing investments at attractive valuations is dependent on the ability to source, create, and grow relationships with founders, owners, and stakeholders. Investing in businesses prior to formal banked processes via proprietary relationships is highly sought after. We've seen this play out over the past few years as market conditions partially contributed to environments for portfolio companies to invest in smaller add-on acquisitions via tapping into their networks.
Originally published 20 March 2024
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