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Vorsichtiger Optimismus, da Private Equity den SaaS-Markt wieder betritt

2 Aug 2023

Our latest Software Sector sector highlights pivotal trends shaping the software industry, offering you a clear vantage point into valuations, growth patterns and transcontinental dynamics.

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For busy readers in a nutshell: 

Valuations have stabilised, but bid-ask spread persists

Carlsquare has observed a clear spread between seller and investor expectations. Buyers have realigned expectations after the fall in value across nearly all software segments, leading some PE buyers to hold back term sheets and thus contributing to the fall in deal flow. Similarly, investor sentiment for listed software companies has become more cautious amidst the macroenvironment. On the other hand, founders are adopting a reserved stance and management teams have deferred major investments or bridged with a debt round. As value expectations converge, many anticipate that H2 2023 will see an uptick in deal activity and aggregate deal value. For the remainder of 2023, the outlook for SaaS company valuations is largely tied to what happens with inflation, continued Federal Reserve rate hikes, and 2023 earnings performance and guidance.

Profitability and growth: A new paradigm
The major correction in SaaS multiples during 2022 was primarily driven by a flight into equities in sectors with stronger free cash flow and less sensitivity to rising interest rates, as well as by reduced enterprise demand and IT budgets, slower earnings growth, and an uncertain economic outlook for 2023.

In the current interest rate environment, some software businesses are being forced to reverse overinvestment during low cost of capital periods and are further facing the need to painfully reducing headcount. For the first time since recording this data, profitable software companies are valued higher than their unprofitable but growing peers. This indicates that investors are prioritising profitability and favouring businesses with proven business models and strong market positions. The market is requiring management teams to achieve profitability sooner than historically expected, and that funds raised before the tech value fall in 2022 be used efficiently to grow companies into the valuations that investors have bestowed on them.

Europeans on the heels of Americans
Since Carlsquare has recorded this data, American software businesses have delivered higher growth than their European peers. Though growth for both American and European software businesses is near a four-year low (9% and 12% respectively), profitability is at a four-year high (20% and 21% respectively). Despite European companies achieving better profitability levels, American companies still enjoy a valuation premium which has expanded marginally since the gap narrowed in 2022 when valuations fell. American acquirors are increasingly seeking value from European targets, which we observed across several transactions we have recently advised on, including Avrios (fleet management software sold to Battery Ventures) and Cimteq (industrial software sold to Underwriters Laboratories).

Vorsichtiger Optimismus, da Private Equity den SaaS-Markt wieder betritt