Private equity favors application software segment despite headwinds

Global private equity and venture capital investments in application software during the first three quarters of 2022 stood at roughly $68.26 billion, reflecting a 15.6% decline year over year, while the broader information technology sector fell 25.4%, according to S&P Global Market Intelligence data.

Yet year-to-Nov. 22, private equity investments in application software globally still exceeded the totals for the trailing five years apart from the record deal year of 2021.

Application software, a term that is now used interchangeably with “enterprise software,” also accounts for a dominant percentage of infotech deals. The number of deals so far this year was about 33% of transactions in the overall IT sector globally as of Nov. 22. Last year, application software transactions totaled roughly 36%.

In terms of value, application software accounted for the largest percentage of infotech deals in North America, representing 67.5% of the whole sector’s transaction value.

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The application software space is comparatively more resilient to macroeconomic factors than other information technology sub sectors, said Bruce Daley, a senior research analyst at 451 Research, in an interview.

Daley noted that once a business starts relying on enterprise software, it becomes difficult to cancel the subscription without affecting operations, creating customer stickiness.

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Valuations have been coming down across infotech this year, including application software. Daley believes the application software industry is going through “an independent contraction,” which is caused by its rapid expansion mainly during the COVID-19 period. “There’s no question that valuations have taken a hit.”

He mentioned Zendesk Inc. as one of the recent examples. The customer relationship management platform rejected a $16.05 billion bid in February and later was sold for roughly $10.2 billion in November.

Other large deals of the year so far include Partners Group Holding AG’s acquisition of enterprise resource planning software provider Forterro for roughly $1.12 billion and Brookfield Asset Management Inc. unit Brookfield Business Partners LP’s purchase of automotive retail technology company CDK Global for about $8.3 billion.

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

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