Is COVID-19 the reason for increased private equity investment in software businesses?

7. August 2020
by Sebastian Priebe

It looks like the software sector is catching more and more attention from private equity investors. They seem convinced by recurring revenue models that support COVID crisis resilience and they may bet on new macro trends around the changing collaboration landscape.

According to the study below, PE SaaS investments have doubled rapidly to ~ 4% of total investments after they had plateaued at ~2% for several years before. But is the increasing importance of software in nowadays life really surprising and the investment trend mainly from COVID tailwind?

Demand for software is growing structurally. As the potential for software and their use cases increases manifold, so do startups and providers offering niche solutions. Those, even while being still small, may gain the attention of investors if they provide potential to establish a winning platform - ideally internationally. We have seen a lot of PE-backed internationalizations in the past. And also established players up to incumbents can be a highly cash generating  parking lot for investment money. So the PE appetite for software has structural fundamentals to it.

COVID may now support this, but not only from positive fundamentals in software, but also from potential pressure on other sectors. It would be interesting to see how the rapid rise of the SaaS investment share is also indirectly supported by negative trends elsewhere.

So curious to monitor the trend evolution in the new normal, but it should come as a surprise if the SaaS investment appetite reverts soon.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

Private equity platform investments in Software-as-a-Service companies increased significantly in 2020YTD as a percentage of all PE deals.