Private equity loves SaaS right now

The Big Story

Private equity ❤️s SaaS

Private equity is roaring back into the world of enterprise tech. 2021 has already topped last year in terms of overall investment — which perhaps isn't too surprising, given the unknowns created by COVID-19. But with more activity expected, it also seems poised to surpass the last several years.

Private equity firms have invested $16.1 billion into software companies over 105 deals so far this year, according to data compiled for Protocol by PitchBook.

• That far outpaces 2020's $13.2 billion total and is nearing 2019's $20.4 billion. And more deals could be coming; Medallia, for example, is reportedly in talks with both Vista Equity and Thoma Bravo.
• The top five most active firms globally are HG Capital, Vista Equity Partners, Providence Equity Partners, ABRY Partners and TA Associates Management, respectively.
• The biggest deals announced so far in 2021 include: Thoma Bravo's $12.3 billion purchase of Proofpoint in April; Clayton Dubilier & Rice and KKR's $5.3 billion purchase of Cloudera; and Symphony Technology Group's $4 billion purchase of McAfee's enterprise business.

And private equity also appears to be getting better at managing software investments. "The private equity playbook is becoming more creative, more diversified. There are more options that firms are taking advantage of, in terms of minority investments, doing more transformative M&A through buyouts, working on longer holder times," said PitchBook analyst Rebecca Springer.

Interest in the space isn't new, but it is getting hyper-competitive. And not just between rival firms. Venture capitalists, hedge funds and mutual funds are all on the software bandwagon.

• The pivot to subscription sales means healthy recurring revenue, which investors love because of the stability it provides. A friendly IPO market gives financial backers another potential exit to consider. And a threatened hike to the capital gains tax is motivating sellers.
• Perhaps most important, however, is the demand. IT budgets are soaring as digitization becomes a top priority within corporate America; Gartner predicts software spending within enterprises to grow 8.8% in 2021.

Still, many of private equity's tried-and-true methods remain prevalent in software today, namely the hunt for smaller acquisition targets that can be folded in to add capabilities or customers. That was evident when, the same day KKR and CD&R took over Cloudera, the company announced it was purchasing Datacoral and Cazena.

• But increasingly there's also a focus on adding advanced capabilities to beef up the existing product suite. Warburg Pincus, for example, invested in Businessolver in 2018 and, alongside a revamped C-suite, quickly doubled down on AI.

Some potential issues are bubbling up with the gobble-them-up mentality. Valuations are ridiculously high right now. And while a market downturn would likely create a huge buying opportunity for private equity firms, some in the industry are pushing for an improved operating model.

• One strategy is to begin to link disparate portfolio companies together to build more of a "business ecosystem," where partner firms are able to cross-sell with one another, among other benefits. Billionaire Romesh Wadhwani is trying out such a model with Symphony AI.

But the biggest threat may be the number of investors on the hunt for the next big software bet. The seemingly limitless funding available for enterprise tech companies, though, means a huge proliferation of vendors in the market. "It's definitely more competitive," Thoma Bravo Managing Director Scott Crabill said. "But there is also so much more opportunity now than there was 10 to 5 years ago. They counterbalance one another."

— Joe Williams (email | twitter)

A version of this story appeared today on Protocol.com. Read it here.

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People Are Talking

Kağan Sümer, CEO of delivery app Gorillas, called out protesting riders in an all-hands meeting:

• "So Gorillas is a riders company, not a politics company. So within this frame this escalation is an escalation of external parties, you know, like external stakeholders, and also not only organized externally, but also it's that misinformation can be picked up quite easily."

The U.S. government's interest in crypto is all FOMO, the Fed's Randal Quarles said, and stablecoins might be a better idea:

• "A global U.S. dollar stablecoin network could encourage use of the dollar by making cross-border payments faster and cheaper. And it potentially could be deployed much faster and with fewer downsides."

Here's part of how Jack Dorsey explained why Square bought Tidal:

• "What really dawned on me was how weak some of the tool sets are for artists, with analytics and data, to understand what they're doing and help them inform their decisions, especially considering other revenue streams like merchandise and touring and NFTs. It felt a little weird on the surface, but when you delve down there's a lot in common."

Making Moves

On Protocol: Tyi McCray is leaving Pinterest. She was the company's global head of inclusion and diversity, and was only at Pinterest for about 10 months.

Dennis Crowley is leaving Foursquare. Well, sort of. He'll still be co-chair of the board, but he's no longer a full-time employee at the company.

Discord bought Ubiquity6, an AR and online experiences company. The tie-up makes sense, given Discord's recent push into Stage Channels and all things groups.

Jeff "The Rock" Bezos? Dwayne Johnson and Bezos have been teasing a "big announcement," which is presumably either that they're making a movie together or that Johnson won the Blue Origin auction and will be going to space with Bezos in a few weeks.

Duolingo is going public. It filed its S-1 yesterday, and said it has its sights set on the entire learning market, not just languages.

In Other News

• On Protocol: Yesterday was one big, huge, giant victory for Facebook. An appeals court dismissed two antitrust complaints against the company, calling the FTC's case in particular "legally insufficient." (The judge did leave open the possibility for a re-file from the FTC, though.) As a result, Facebook's stock jumped, and it became a trillion-dollar company for the first time.
• On Protocol: Xbox Cloud Gaming is out of beta. All Game Pass Ultimate subscribers can now get access to the $15-a-month game-streaming service. Approximately two-thirds of Protocol's staff is currently debating signing up.
• Elon Musk might get the Jobs biography treatment. He's reportedly talking with Walter Isaacson, who has become the unofficial Tech Titan Biographer, about a book. Meanwhile, to celebrate his 50th birthday, Public built and gave away 100 mini-Musk statues, and plunked down a life-size one in downtown NYC.
• Don't miss this story on ICP, the Dfinity token that was supposed to help fund the decentralized future of the internet but instead has lost nearly all of its value in record time.
• Samsung is back in the watch game. It showed off some new designs for the wearable OS it's building with Google, and it already looks better than anything Tizen ever did.
• The House passed its answer to the Endless Frontier Act. It actually passed two bills, which together would bring much more funding for science and research at places like the National Science Foundation. But there's no money for semiconductors here.

One More Thing

The Github treasure trove

Here's an oldie but a goodie (and one that's been floating around recently): The Book of Secret Knowledge, Michał Ży's compendium of apps, ultra-niche tools, blogs, Twitter accounts, Terminal commands and practically everything else you could need to learn programming or at least hack the ever-living youknowwhat out of your device.

It's like a magician giving away every one of his tricks, all in one Github repo. Bookmark this one, spend some time during this (very slow) week poring over it, and start preparing yourself to say the phrase, "Oh yeah, I saw that on Burp Suite" all casual-like.

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