In the Financial Times article, “Private Equity Bets Big on Software”, Tom Braithwaite describes how tech-oriented funds (the likes of Vista Equity Partners, Thoma Bravo, and Silver Lake) are at the forefront of aggressive investments with the capacity of reshaping the software industry.
Anthony Armstrong, Head of Technology Mergers at Morgan Stanley notes that PE shops like Vista Equity are blazing a new trail, “It’s like the Golden State Warriors,” he says, comparing them to the highly successful Bay Area basketball team, which has revolutionized the sport with its mixture of pace and aggressive shot-taking. “Smaller players, moving quickly, making three-pointers.”
This form of aggressive investment in the tech sector, where deals are often closed with less due diligence than is typical, is raising eyebrows from those in the space, “They are prepared to pay an EBITDA multiple that is almost ridiculous,” says a partner at a rival firm, referring to the standard valuation that considers the price paid as a multiple of earnings before interest, tax, depreciation and amortization.”
Despite this, tech is now attracting all types of Private Equity firms, with the sector representing almost 41% of U.S. buyouts in 2016 – this is the highest proportion on record and up from around 10% in 2010.