Vista’s Patrick Severson: Promising enterprise software sectors in 2024 include cybersecurity, energy transition, healthcare IT

Vista signed two platform investments, TRG Screen and Energy Exemplar, in H2 despite the deal downturn.

One of the most popular stories on PE Hub in 2023 was Why private equity firms still love enterprise software. To gain some updates on investing in the sector, we turn now to Patrick Severson, a senior managing director at Vista Equity Partners who is also co-head of the Vista Foundation Funds. The interview is part of our ongoing series of Q&As with PE dealmaking thought leaders.

How would you describe 2023 from a dealmaking standpoint?

It was more muted from a volume standpoint, but largely in line with expectations as companies adapted to and navigated a more uncertain macro environment. We actively engaged with the high-quality companies in our pipeline, all of which remain great fits for our model, and in the second half of the year we signed two platform investments – TRG Screen and Energy Exemplar – both of which we believe will be excellent additions to our portfolio.

Vista’s Foundation strategy works with middle-market companies that are looking for a strategic and operationally-focused partner that can help scale platforms for longevity. TRG Screen efficiently and profitably carved out a category leadership position helping organizations, primarily in the financial services sector, optimize their increasingly complex and costly market data subscriptions. Energy Exemplar serves a similarly complex and growing market, providing a cloud-based energy modeling and simulation software used by regulators, system operators, large-scale utilities and energy producers. Both businesses fit squarely in our sweet spot and will benefit from deployment of our best practices as they scale their operations to meet respective market opportunities.

What’s your take on valuations?

We have always been disciplined in our asset selection and deliberate in the way we deploy capital – that remains unchanged. Great businesses command competitive valuations, and business quality is the number one criterion for our strategy. Our success is driven by partnering with founders and management teams to create value and scale category-leading franchises.

We saw a relatively significant correction in public market valuations over the past 12-15 months, and the private markets typically follow closely behind. We eventually expect to see private valuations move to reflect asset quality, although that will take time as expectations are reset. Illustrative of this rationalization of value to quality, over half of the opportunities we looked at this year did not end up trading at all.

Market dislocations like this one often present accretive add-on opportunities for our platform companies that operate in fragmented areas of the market. Subscale assets are facing a different funding reality, with rounds of financing less certain today than in past years, and prolonged economic uncertainty creating more urgent capital constraints and driving attractive valuations. Since September 2022, our portfolio companies have steadily and opportunistically completed nine strategic add-ons. Across our portfolio, we always look at avenues for inorganic growth, partnering with our teams to act as consolidators in their markets.

What differentiates Vista Foundation Funds?

While Vista’s private equity strategies target companies in different lifecycle stages, our fundamental principles and strategies are broadly consistent. Each invest exclusively in enterprise software businesses, working with mission-critical providers of B2B solutions that have “sticky” and resilient annual recurring revenues and exhibit strong, sustainable underlying growth characteristics.

Our Foundation strategy is purpose-built to invest in emerging category leaders and partner with them to scale into enduring software franchises. These companies have proven product market fit, strong traction and success with their customers, and are looking at how to scale to capture the broader market opportunity ahead of them. This is a very specific stage of growth for software businesses, where our best practices and position as an experienced middle-market investor within a $100 billion-plus enterprise software ecosystem becomes powerful. We feel that providing access to the shared expertise, resources and value creation infrastructure of the broader Vista platform is a major differentiator for our Foundation strategy.

Within enterprise software, which subsectors are most ripe for dealmaking?

We continue to believe that investing in companies bringing mission-critical, high ROI, “must have” enterprise software solutions to market remains the best use of capital anywhere in the financial markets. There is significant intrinsic value in these companies and their products, and this value is dispersed across a wide range of end markets and users, which is advantageous when your goal is to construct a diversified portfolio that can deliver consistent outcomes. We continuously evaluate investment themes and sectors where we think we will find the most attractive opportunities. Some thematic verticals with strong secular tailwinds we are monitoring closely include cybersecurity, energy transition and infrastructure, governance, risk and compliance, office of the CFO and healthcare IT workflow.

What are your thoughts on GenAI?

GenAI will likely drive significant disruption and incredible opportunity in enterprise software, but we are still in the first phase of a multi-year journey. Data is the foundation of enterprise software, and AI advancements have the potential to help software companies harness large swaths of information to provide intelligent insights, automate repetitive tasks, improve user experience and optimize processes. By integrating AI into their products, software businesses can leverage their proprietary data assets to drive innovation and unlock additional customer value, resulting in more powerful and efficient solutions for users and increased ROI for customers.

Our primary focus now is on identifying and forming actionable strategies for each of our portfolio companies on how they can play both offense and defense in response to emerging risks and opportunities related to AI. These potential risks and opportunities are not uniform across our portfolio – they are shaped by individualized company and market-specific technology, product and operational considerations. That’s why we have established various internal processes enabling us to work daily, weekly and monthly collaboratively across the entire firm’s portfolio to accelerate responsible and scaled adoption of GenAI applications within those businesses.

We also believe Vista can move faster to drive change and provide shared resources and fundamental building blocks – including our deep, mature relationships with critical technology providers – to ensure our portfolio companies and future investments are well-positioned to capitalize on what we feel is the most meaningful technological shift since the proliferation of the cloud.

What’s your forecast for enterprise software dealmaking in 2024?

We feel this environment is a great fit for our Foundation strategy, and that our experienced team, finely-tuned sourcing engine and sophisticated value creation platform place us in a strong position to capitalize on opportunities ahead. We saw a pick-up in volume in the second half of the year and expect 2024 into 2025 to be quite active for those who are value-additive investors.

We operate in a sizeable market – over 95 percent of software companies are private – and continue to see attractive and high caliber opportunities enter our pipeline. During uncertain times, we have seen founders and business leaders place an increased premium on working with experienced and operationally-focused investors that are ready to roll up their sleeves to help them build sustainable growth practices during this critical phase of their journey. This is what Vista’s Foundation strategy is designed and built to do.

For more of PE Hub’s ongoing series of Q&As with private equity thought leaders, see: