We are delighted to share the most recent Software / Private Equity market review from our partners at Software Club. As a leading Software and Private Equity executive search organisation, we are partnering with Software Club to bring a rigorous data underpinning to our work and the daily market observations that are so evident.
We have included two charts (below) from this impressive report for your interest, but there is much more to discover.
If you would like the full copy, please get in touch with Ed Fanshawe or Tim Chamberlain.
Here is a snapshot of several important points that the team at Software Club highlight:
Stock market performance
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- US stock markets have been performing well in 1H24, with S&P500 and Nasdaq being resp. up ~+15% and ~+19% at the end of August while our B2B software index(1) has been lagging at ~+1%. Despite higher volatility during the end of July / beginning of August, performance has continued until September, with B2B software partially filling the gap (~+20% and ~+21% for S&P500 and Nasdaq vs. ~+7% for B2B software index.
- In October 2024, stock markets have been slowing down, with the S&P500 and Nasdaq both down ~(1%) and B2B software flat (~+0%).
- When zooming in our B2B software index(1), performance is contrasted with several segments clearly outperforming on a YTD basis at the end of Oct. (Majors ~+35%, Vertical software – Financial services ~+26%, Supply Chain Management and Procurement ~+19%) while 4 segments show negative performance (Vertical software – Healthcare ~(6%), Workflow mngt. And Productivity ~(5%), Application development, Devops and IT Operations ~(4%), Vertical software – Industrial ~(2%).
Deals & IPOs
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- Deals in the software industry have been volatile over the past years in North America and Europe, with peaks of deals observed in 2021 for VC and corporate M&A and 2022 for PE deals. All transactions in the software space were down in 2023, primarily due to smaller deals on average and a decrease in the number of deals.
- Deals on average are much larger in North America than in Europe which can be explained by software companies being larger on average and a premium in terms of multiple valuation, supported by higher rule of 40 on average (FCF-based median at 30.3% in NA vs. 21.8% in Europe in our B2B software index.
- Transactions have recovered in 2024 YTD, with levels already above 2023. IPO are still very silent in October, with two filings this month (Genesys and LightOn) in the B2B software space, potentially fueling hopes for more AI companies looking to go public in 2025.
B2B software valuation & financials
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- B2B software has evolved over the past 6 months in the ’14 –’19 and ’14-’24 average range (4.9x – 6.2x), reaching 6.0x by the end of September. The trend observed in the B2B software space of slowing growth (from 24.2% NTM in ’22 to 11.1% in ’24) vs. margins going up (11.7% FCF NTM in ’22 to 16.2% in ’24) has persisted over the summer of 2024. It is supported by companies focusing more on profitability in this slowing demand environment.
- Hence, investors focus on companies with outperforming growth expectations (+20% NTM) or high profitability, that are valued at significant premium.
