Software-as-a-Service: you may have heard references to this type of business more and more frequently as private equity investment into the sector has grown exponentially over recent years. In case you haven’t, SaaS is a way to access software via subscription-based model to an internet cloud portal.
According to recent research, there have already been 15 PE acquisitions of SaaS organisations in Q1 of 2019, and there were almost 90 in total in 2018. Comparatively only 4 acquisitions of SaaS companies were made by private equity all in all 10 years ago in 2018 – this means there was a growth of 2150%, a very high figure. So, why have private equity firms become so interested in SaaS businesses over the past decade?
Technology and software are now key to every aspect of business, so it is now surprise that the SaaS market has grown so much. Furthermore, it is a scalable business model – meaning there is lots of potential in both singular entities and the entire market. As SaaS can be implemented in any industry this makes it a very attractive prospect – a private equity firm may invest in a SaaS firm interested in education and end up expanding to health and real estate as well! Furthermore, this type of business offers recurring revenue as it is a subscription service, without much capital expenditure needed as they are asset-light organisations.
Despite, SaaS being sector-agnostic, it seems currently over 30% portfolio companies offering Software-as-a-Service serve the education, healthcare and finance industries. This may indicate that this is where the biggest returns are, but there may be golden opportunities in (as yet) less invested industries like automotive, media and insurance, which currently each account for only about 2% of SaaS portfolio companies.
Fleur Hicks, Managing Director of onefourzero says “the number of software assets we are working on this year, whether in diligence or using these as part of portfolio digitisation has trebled since last year. There is a real recognition that digital transcends the typical perception of ‘having a website’ and asset owners are coming to understand that digital infrastructure is playing a huge part in value creation.”
Charlie Cannell, Digital Director at Inflexion, adds: “Software solutions provide efficiencies across all sectors and touch upon everything from ERP and CRM to stocking and logistics management. Software-as-a-service brings to the fore a realisation that digital is a key lever for asset growth and with that in mind, is a highly valuable investment area for some time to come.”
onefourzero could assist private equity firms considering an investment into a Software-as-a-Service firm by offering digital due diligence as well as ongoing post-sale support. To find out more about us, get in touch with firstname.lastname@example.org.