The Buyout Frenzy in Vertical SaaS

Is Private Equity a Viable Path for Venture-Scale Exits?

The secret—if it ever was one—is out on PE’s fondness for vertical software. While PE-backed acquisitions were down 50%+ from a peak in 2021, vertical buyouts have continued to grow, and the fervor seems to be gaining steam.

In today’s essay, we will pose an answer to one question: is PE a viable path to exit for a venture-backed startup?

Early vSaaS buyout champion Vista Equity is ramping deals aggressively, and peers like GTCR and Thoma Bravo aren’t far behind. Mid-market PE and micro-growth players like Main Capital Mainsail and Blueprint Equity are building franchises of their own around vertical. In the true long-tail buyout world, Constellation Software has become a cult favorite and still tops the deal count league tables—not to mention its spin-outs (e.g. Bayan, Arcadea) and -offs (e.g. Lumine). New funds are innovating the vSaaS PE strategy, from hyper-focused buyout shops like Merit Holdings and Newbury Franklin, to novel incubation platforms like the ASG-inspired Boundless.

In 2023, vertical software represented over half of sponsor-led B2B software activity, and so far, it doesn’t seem like 2024 will be an exception. We’ve spoken at length in prior essays about why vertical software as a business model is an attractive asset for PE—in addition to being naturally resilient businesses at scale, with often fewer competitors, they lend well to roll-up and merger strategies that aim to further dominate a specific industry.

In today’s essay, we will examine recent trends across vertical buyouts to pose an answer to one question: is PE a viable path to exit for a venture-backed startup? Coincidentally, the first deal we (Nic and Omar) worked on together resulted in a nearly $1B exit to a PE firm. Historically, though, the venture community never viewed sponsor-backed exits as more than a plan B. Common wisdom being that price-conscious PE managers look for deals rather than pay the high multiples a fast-growing software startup commands.

Whether right or wrong, some players in the vSaaS world are starting to challenge that traditional viewpoint and consider PE (or PE-backed platforms) as an increasingly attractive exit avenue. Todd Saunders—the founder of Broadlume, a case study in vertical software we love—recently shared his perspective on the trend:

As we walk through the numbers, we’ll unpack trends around three types of buyout we’re seeing, to understand how and why PE is leaning into vertical software:

1. More traditional $2-10B+ buyouts and take-privates led by the likes of Vista Equity, GTCR, Bain, Thoma Bravo, etc. with a growing vertical footprint.

2. Sponsor-backed acquisitions in the $50m-3B range, sometimes standalone but usually as add-ons or components of a larger vertical platform in a PE portfolio.

3. Targeted, mostly <$50m buyouts that comprise most of the deal count but a minority of the value, most frequently led by vSaaS holding companies.

Especially as it pertains to that second category, we’ll also take a look at whether the data backs up the anecdotal evidence—and whether founders and GP should start to think about sponsor-driven exits as more than just a backup plan.

The State of Vertical Software Buyouts

Following several years of fast living, the buyout world is nursing an acute hangover. Bain put it a bit more professionally in their latest annual PE report:

The word for this market is stalled. Cutting through all of the macro noise was the 525-basis-point increase in US central bank rates from March 2022 to July 2023. The speed and magnitude of this rise caused general partners to hit the pause button.¹

With the ongoing liquidity drought, accelerated capital velocity from the 2018-2021 era has led to inflated PE portfolios. 26% of buyout portcos are over 4 years old, pushing median holding periods up over 6 years. With $300B in leveraged loans coming due over the next 18 months, pressure to return capital to LPs is mounting.

1H’24 saw activity down 30-40%. At the same time, buyout funds are sitting on a record ~$1T in dry powder. One reason—perhaps in addition to stabilized rates—why overall buyout activity is still at or above pre-2021 years. 2024 so far has also been a story of scale vs. volume, with Enterprise Value up nearly 20% YoY. Despite the kick in the teeth, buyouts have more-or-less reverted to the mean.

Software tends to be fairly consistent as a buyout segment, perhaps because it is a bit less cyclical and benefits from endemic expansion (as software eats the world). As usual, 2021 was an outlier, seeing $90B of deals. Every year over the past five, however, has seen sponsor buy $40-65B worth of B2B software businesses every year since 2019.²

Vertical SaaS buyouts are especially resilient, down less than 30% since 2021 vs. nearly 60% for horizontal businesses. Aggregate deal value was smaller for vertical than horizontal, but not tremendously so, with $125B and $170B in transactions respectively over the last 5 years.³

In fact, the vertical share of total software buyouts has steadily grown. Since we aggregated this data, GTCR completed its $12.5B LBO of Worldpay—a payments platform for omni-commerce merchants—which will swing the YTD vertical share closer to historical averages. That said, we have nearly half the year left and a handful of big vertical deals around the hoop, like Eliot’s proposed buyout of E2open.⁴

While the general growth of software markets could explain this uptick, there are signs that smart players smell an arbitrage opportunity in vSaaS. Vista Equity, a longtime leader in vertical software buyouts has been accelerating pace since 2021:

Since October of 2022, Vista has completed five take-privates—Avalara, KnowBe4, Duck Creek Technologies, EngageSmart and now Model N. Combined, these transactions represent over $20 billion in total enterprise value for five leading enterprise software companies serving a diverse range of end markets.⁵

We’ve talked at length in past essays about the relative attractiveness of vertical software—these same elements are attractive to buyout sponsors. Most relevant to the conversation today, however, is their synergistic potential. By uniting two or more SaaS businesses in a vertical, one might hope to cross sell customers and create a more dominant industry platform. Taking one example from Vista in the alternative asset management software space in 2019:

[Vista Equity] combined Black Mountain’s data aggregation, process management and business reporting capabilities with AltaReturn’s solutions for private capital fund managers, administrators and family offices, creating an all-encompassing product offering for alternative investment software solutions. The merger would form a new entity: Allvue Systems.⁶

Vertical software buyouts also offer a compelling opportunity for scale arbitrage. Top-performing small- and mid-cap stocks are currently trading at a near-record discount to large-cap peers, at ratios comparable only to downturns in the Stagflation and Dot Com eras.⁷ In 2023, a PE Hub found that 94% of PE managers were likely to pursue-take privates, versus just 13% a year prior.⁸ Interest isn’t surprising once you layer on high regulatory costs of staying public and tons of dry powder—with willing sellers, the opportunity is the same for large private players.

When it comes to PE roll-ups and focused vertical markets, it’s easy to write off sponsor M&A as mostly small-beans tuck-in. Across B2B software buyouts, however, the median size of vertical deals is just about the same as horizontal peers in any given year. Vista et al aren’t chasing arbitrage from niche to broad—they are leaning in to the power of the vertically focused platform, marrying big, performant businesses to drive multiple expansion on several axes. Sub-scale tuck-ins happen often, of course, but PE’s willingness to pay up for quality vertical businesses at any scale—$50m, $500m, or $5B—is increasingly clear.

Vertical Buyouts as an Exit Path

As we’ve heard from more than one founder across our portfolio and Vertex, there’s growing interest in the possibility of PE as a startup exit path. Certainly, some of this thinking is driven by an anemic corporate M&A environment. The state of corporate acquisitions isn’t great but likely also feels worse than it is for two reasons:

1. Public markets are now rewarding growth to profitability at 1:1 vs. 2:1, likely leading corporates to spend more time on the 27k companies sitting in PE portfolios over high-growth, unprofitable startups

2. Acquisition Enterprise Value in 2024 has been dominated by mega deals⁹, leaving fewer recent, healthy recent startup exits for founders to anchor on mentally

That said, our anecdotal evidence seems to be following the facts on the ground. Exits of venture-backed startups to sponsors are demonstrably on the rise, especially within vertical software. Whether due to the scale arbitrage opportunity, the PE dry powder glut, or another reason, sponsor-backed acquisition of VC-backed companies is up approximately 2x since 2021. We came to this conclusion looking at consummated deals for businesses with venture backing that had no prior history of control transactions. Interestingly, 2024 in particular has been dominated by vertical SaaS, which represented 80%+ of deals and the vast majority of deal value year-to-date.

Just because we’re seeing more sponsor-led startup exits, however, does not mean they are attractive exits. Inevitably, some PE-driven deals involve startups that have achieved some scale but are stalling, with poor prospects for a true venture-scale outcome. So we compared EV / Revenue multiples across B2B software buyouts over the last 5 years. This exercise is complicated by the fact that most such deals do not report financial data, meaning our dataset likely consists of the top ~20% (pure guess) most attractive outcomes as a data set. Given we’re only trying to answer whether great sponsor-led startup outcomes are viable, however, we don’t think it dilutes the our point.

Examining our B2B software buyout data below, the “7-10x multiples” that Todd at Broadlume mentioned in his post look pretty damn accurate. In vertical SaaS specifically, average multiples are actually a hair over 10x, marginally beating out horizontal cohorts. One caveat is that this set does include some older businesses—no founder or VC shoots for a 15 year holding period in mind. Another is that this set includes many at-scale businesses—we can’t say whether the same multiples would hold up looking at $5-10m ARR businesses.

What we can say is that it’s fairly clear who—outside strategics—is driving well-valued acquisitions of venture-backed startups: traditional PE shops and VCs with emerging control strategies. Vertical software holding companies—a strategy popularized by Constellation Software and now pursued by a dozen or so others¹⁰—lead the league tables by deal count. But if the apple didn’t fall far from the tree, the vast majority of these deals are tiny, profitable, and valued nowhere near close to the multiples a modern startup founder would seek. Howard Leung, an analyst covering Constellation, estimates they pay less than 1x revenue on average.¹¹

The right sponsors with the right strategy, however, can justify real software multiples. In some cases, their willingness to pay may even higher than corporates—the right synergies with a pre-existing vertical platform can make a dollar of revenue worth much more (e.g. cross-selling, improved retention, competitive advantages).

The easiest way to substantiate the VC-backed exit to PE is by simply looking at comps. Our data set offers a few compelling examples—Tock, Euna, AuditBoard—but by-and-large these had a bit more scale, age, and capital behind them that the aforementioned $5-10m ARR, pre-growth startups.

That said, we wouldn’t be surprised if there were an increasing number of these happening at earlier stages, and at healthy revenue multiples. The data isn’t public—and likely won’t be outside of anecdotal examples—but I’d love to see the numbers behind deals from some of the more venture-minded players above, like Battery or Bessemer Venture Partners (BVP Forge).

In our final estimate, PE isn’t quite a clear path to venture-scale outcomes—yet. But it is a viable path, in a way it was definitively not 5+ years ago, and perhaps an increasingly accessible one.

Until macro conditions lead us to re-evaluate, we feel pressure to innovate in the broader private equity world is likely to accelerate what is today an early trend. And the points of the spear may be names less commonly associated with PE. The truth is that, while buyout funds at holding a ton of dry powder (about a quarter of the $4T total across all of private capital today), that category has always held a lot in reserve. As of 2023, buyout dry powder sat 28% above a 5-year average. On the same metric, venture capital is 69% above baseline. While a16z’s supposed entry into PE was a case of premature reporting, it’s not far-fetched in the slightest.

Any high-multiple, sponsor-led software acquisitions we missed? We’d love to hear from you in the comments below. Thanks for reading Euclid Insights!

1. Bain & Company (2024). Global Private Equity Report. Bain website.

2. US and Canadian app layer (ex. security / infra) software buyouts >$100m in deal size.

3. Eucid (2024). Euclid analysis of Pitchbook data. Pitchbook.

4. Baker, Tse (2024). Elliott Considers Buyout of Supply-Chain Software Firm E2open. Bloomberg.

5. Fischer (2024). Why Vista has closed five take-private deals in less than two years. PE Hub.

6. Allevue Systems (2019). Allvue Systems and Vista Equity Partners. Allvue Systems website.

7. Sundar (2024). Are overlooked small and mid cap stocks about to surge? JP Morgan Wealth Management.

8. Canton (2024). Why PE-backed take private deals are more popular than ever. PE Hub.

9. Levy (2024). Global M&A Trends 2024. PwC.

10. E.g. Banyan Software or the recently-announced Arcadea. Per: Riehl (2024). Arcadea Group secures $336 million CAD to acquire vertical SaaS companies. BetaKit.

11. Keely (2022). Mark Leonard (Constellation Software) Operating Manual. Colin Keely website, citing Veritas Research Analyst Howard Leung (if anyone can find the original transcript, let me know).