Private equity plunges into software; Vista Equity is top buyer: Moody’s

  • There are nearly 80 private equity-backed software companies: Moody’s
  • Vista Equity is the most active acquirer of software companies
  • In 2018, 75 pct of new software issuers were rated B3

Private equity can’t get enough of software.

PE firms now own nearly 80 software companies, up from few or none in the early 2000s, Moody’s Investors Service said in a Dec. 14 report. Of the current total, 70 are in the U.S., the credit-rating company said.

PE is drawn to software’s recurring revenue, Moody’s said. Companies in the sector can also generate significant cash while generally having limited capital expenditures, Moody’s said.

‘Private equity loves software’

“Private equity loves software,” said Alok Singh, co-founder and managing principal of Bridge Growth Partners, a mid-market firm focused on investing in software and other tech segments.

Singh is a former managing director of New Mountain Capital, a frequent acquirer of software companies. New Mountain sold Deltek to Thoma Bravo in 2012. It still owns JDA Software, which received an investment from Blackstone in 2016.

Technology is transforming every business, Singh said. “Industry after industry is getting restructured,” he said. “If you are not savvy with how to use technology, it’s a major detriment to your business and competitive success.”

Moody’s global rated software universe includes more than 30 active PE firms. As expected, Vista Equity Partners is the most active acquirer.

The buyout shop, founded in 2000, was relatively unknown a decade ago. Vista owned 10 companies as of August, making it the top buyer of software companies, Moody’s said. Holdings include Tibco Software, Alegeus and Solera.

Vista last week said it acquired 7Park Data. It also agreed to buy Apptio Inc for $1.94 billion in November.

“Vista has grown to be a very prominent private equity firm on the back of its software and technology investments strategy,” Singh said.

Thoma Bravo, which often competes with Vista on deals, is second with nine investments. The Chicago buyout shop is in talks to buy McAafee from Intel and TPG for more than $4.2 billion, CNBC reported.

Thoma Bravo is buying Veracode for $950 million, Reuters reported in November. It bought Imperva for $2.1 billion in October.

Placing third is Hellman & Friedman with five deals. Five buyout shops — Permira, Francisco Partners, ION Investment Group, Apax Partners and Bain Capital – are tied for fourth with four companies, Moody’s said.

The pace of software investing has changed in the past decade.

In 2007, Golden Gate Capital and Hellman were the top software investors with three deals, Moody’s said. Thoma Cressey Equity Partners, the predecessor of Thoma Bravo, was second with two. Carlyle Group also placed second with two deals.

Moody’s expects buyout shops to continue to invest in software. “The industry is fragmented and significant additional opportunities remain for PE firms to acquire from founders, early-stage investors or public entities,” said Matthew Jones, a vice president and senior credit officer at Moody’s and author of the report.

Financials lag

While software is hot, the financials of the PE-backed companies aren’t as noteworthy.

The vast majority of PE-controlled companies are rated B2 or below, Moody’s said. In fact, 75 percent of new software issuers in 2018 were rated B3, up from 9 percent in 2012, the rating company said.

Median leverage for software companies hit nearly 8x by 2017 compared with roughly 6x before 2013, Moody’s said. Obligations rated B are considered speculative and subject to high credit risk. B2 is more speculative than B1, while B3 is the most speculative.

Most companies can reduce their leverage after they are sold to a buyout shop, Moody’s said.

Few actually do so. Most end up taking on more debt to fund additional acquisitions or pay out dividends, Moody’s said.

“As a result, PE-owned software companies are rarely rated above B2,” Moody’s said.

Action Item: Contact Moody’s at +1 212-553-1653