A rebounding software market, driven by profitability and strategic M&A

Our latest software sector report highlights dynamics and developments, as well as M&A trends in the software industry.

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 Valuation levels in the software sector are rebounding, reflecting growing investor confidence in resilient software companies with strong underlying SaaS metrics

• The rise in EV/ Revenue multiples in Q3 2024 reflects strong investor confidence in profitable, recurring-revenue software assets. Despite ongoing macroeconomic uncertainty, premium valuations have persisted for defensible, high-quality companies
• From 2023 to 2024, strategic buyers increased their investment in software M&A, taking advantage of attractive opportunities amid reduced competition from private equity. This trend highlights confidence in leveraging software assets for strategic growth and operational synergies. Notably, public-to-private transactions are up 17% in 2024 from 2023, with multiple large deals, such as Blackstone and Vista’s buyout of Smartsheet ($8.4bn) and Permira’s acquisition of Squarespace ($7.2bn)

In 2024 investors continue to seek profitable and growing software companies, which trade at higher valuation multiples compared to unprofitable (but higher growth) peers

• Profitable software companies are trading at EV/ Revenue multiples of 4.2x in 2024, compared to 3.7x for higher growth, unprofitable peers. This demonstrates that investor preference is more focused on stability and cash generation amid an uncertain macroeconomic environment. Growth companies have historically traded at a premium of 1.0 – 3.5x revenue to their profitable but lower growth peers
• Growth as a whole has become harder to come by and has fallen across both cohorts. Despite higher revenue growth among unprofitable companies (13.3% vs. 9.6%), investors are prioritizing profitability, valuing predictability and resilience over growth at higher cost. Carlsquare anticipates that as interest rates fall, investor preference will return to growth companies, as has been the historical norm