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October 6, 2017

Strategic and investor appetite for SaaS drives record levels of activity

The appetite for software strategic investment looks set to continue and software for cyber-security will be one of the hottest areas.

By James Nunns

Investment in the software sector continues to be bullish, in terms of strategic transactions and institutional investments – it is entering hunting season.

Across a number of sub-sectors, software-as-a-service (“SaaS”) businesses are being acquired as major enterprises and investors recognize the significant investment opportunity presented by SaaS companies. The scalability, flexibility and economics of SaaS companies have captured the attention of large technology companies, software consolidators and investors, as SaaS continues to disrupt and transform traditional

Jonathan Cantwell, Director, GP Bullhound

industries and services.

SaaS is attracting significant funding, with venture capital and private equity firms, traditional and non-traditional tech consolidators all investing heavily. The attraction to SaaS comes as firms across all industries seek to automate work streams and increase the efficiency of their day-to-day businesses, such as internal collaboration, social marketing, or security.

Ease of use and implementation is certainly one reason behind the increased demand for Software as a Service. Previously, switching from conventional practices to software-based applications meant a tedious and lengthy installation process. Now the implementation times of most SaaS applications is much shorter, in many cases instant, while there are also great customization options meaning an almost seamless user experience. This focus on usability has become a critical factor for SaaS vendors’ success, and a smooth user experience is now demanded by customers.

Another factor behind the increase in investor appetite is the high returns offered by SaaS business models. SaaS businesses often have high amounts of recurring revenue, meaning, if a company did not add any new customers during a given time period, they would retain nearly all of their revenue recognized in the prior period. Additionally, most successful SaaS businesses are able to up-sell – land & expand – their customer base, achieving net revenue retention amounts well above 100 per cent. As an investor, you cannot wish for more than a company with high recurring revenue, high customer retention rates, coupled with a differentiated product offering in a large market opportunity.

These factors explain why M&A in SaaS has been very active and the number of deals has increased year-on-year. One driving factor has been unprecedented activity in private equity. Vista Equity and KKR are two elite private equity groups who have aggressively acquired a number of highly recurring, sustainable SaaS businesses through platform and add-on acquisitions. Vista Equity invested in event management software company, Gather, and acquired marketing software platform, Lithium, in recent months, while KKR invested $70 million in Ivalua, a market-leading spend management software company.

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These firms are not alone in their aggressive approach to purchasing SaaS firms – the interest in SaaS is shared across the private equity landscape. In fact, 40 per cent of SaaS acquisitions in 2017 were by private equity investors. The number of private equity M&A deals in SaaS rose from 240 in 2013 to 336 in 2015, whilst the first half of 2017 has seen over 200 private equity deals.

However, it is not only private equity investors driving Software as a Service investment, the strategic expansion of traditional and non-traditional technology consolidators is also helping to create a robust and competitive investment environment. Software consolidators, such as Oracle, are seeking growth-focused M&A deals to expand product lines, customer bases and geographical reach. Oracle’s purchase of Textura, a construction-focused, collaboration and productivity SaaS business, completely shifted the market and allowed Oracle to extend its construction software offerings beyond its Primavera business.

There is also a whole host of non-traditional technology consolidators now active in the market and investing in SaaS. Verizon’s purchase of fleet management and GPS tracking provider, Fleetmatics, is evidence of non-traditional software companies acquiring vertical SaaS companies for large, adjacent market opportunities and disrupting other industries that they see as under-penetrated. Firms such as GE are also acquiring complementary software businesses, like ServiceMax, in order to drive growth and scalability, and to provide improved services and support to their customers.

The appetite for software strategic investment looks set to continue and we see one of the next hottest areas for software as cyber-security. Software solutions are increasingly being utilized by governments and federal organizations worldwide for direct prevention and detection of cybercrime. As the seriousness of issues surrounding cyber-security develop, attention towards automated software will grow as it has the potential to have a massive impact in combatting the threat of cybercrime to both businesses and humanity.

2017 has certainly seen software investors and consolidators focus on strategic moves, acquisitions, partnerships, and investments. Competition and valuations for software businesses are at all-time highs for quality companies. We believe we will continue to see the software market disrupt and transform all industries, services, and generate high levels of innovation and investment going forward.

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