Private equity investments in systems software reach a five-year low

Global private equity investments in systems software companies are on track for a second straight year of decline, reaching their lowest annual level since 2018.

Private equity and venture capital investments in the sector totaled $12.69 billion for the year to October 30, well below the full-year 2022 total of $35.87 billion. This is evident from figures from S&P Global Market Intelligence.

The number of deals has also fallen. Data shows that there have been 616 transactions in the sector globally so far in 2023, compared to a total of 1,028 deals for the entire year of 2022.

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Private equity invested $70.51 billion in systems software companies in 2021 as valuations rose, prompting industry talk about overpaying for the assets. The investment climate then changed sharply.

“It is not surprising that private equity and venture capital activity is declining as macroeconomic headwinds such as higher debt costs have slowed overall deal activity,” 451 Research analyst Iuri Struta said on a call.

According to Struta, things could be much worse if artificial intelligence and the increased demand for data management software and automotive technology were not attracting investor interest.

“Without these secular tailwinds, I think deal activity would be much lower,” Struta said.

In the third quarter, investments in the sector fell from 178 transactions to $2.60 billion, compared to $9.50 billion in 231 deals in the same period a year ago. Investments fell 60.1% sequentially, compared to $6.61 billion in the second quarter.

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North American-based companies attracted the most capital, accounting for nearly 47% of the value of global private equity deals in the sector. The region raised $5.97 billion through 270 deals, followed by Europe with $4.20 billion through 149 deals.

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Silver Lake Technology Management LLC’s $2.87 billion acquisition of Software AG, which provides software development, licensing, maintenance and IT services, is the largest transaction of the year so far.

For the second-largest deal, Crosspoint Capital Partners LP acquired Canadian company Absolute Software Corp. for $870 million. Absolute Software provides services for the management and security of computer equipment, applications, data and networks.

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451 Research is part of S&P Global Market Intelligence.

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