PE software returns face disastrous math
The thesis argued, echoing Apollo's view, is that private equity software buyouts from the peak valuation era face severely impaired equity returns due to high leverage and multiple compression.
The argument
The speakers argued that many SaaS companies acquired by PE firms at 10x-14x multiples with heavy debt are now valued at only 5x-6x in a slower-growth environment. Because the debt sits senior to the equity in the capital stack, the equity portion of these investments is heavily challenged, forcing sponsors to hold assets longer to grind out minimal returns.
The thesis, stress-tested
✓ What validates it
- ✓Private equity firms reporting significant write-downs on 2020-2021 vintage software funds
- ✓An increase in defaults or restructurings within private credit portfolios lending to software PE deals
▸ Risks discussed
- ▸A rapid decline in interest rates easing the debt service burden on leveraged software companies
- ▸A broad public market re-rating of SaaS multiples back to peak levels
Hear it yourself
"And so you're assuming that you're able to know Twilio is a $25,000,000,000 company, which you probably wouldn't have said it was at the time. That is a billion dollar position to you as a seed or a series a investor. How do you think about accurately identifying given we continuously accept we can't anticipate outcome size? Listen. I I think it's a good question, and and and I've made many, many, many, many mistakes. I will but I do think the inverse is if you see tangible reasons, it can't create a billion dollar position."
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