Private Equity Investing in Software as a Service (SaaS) Companies
We have previously shown the meteoric rise in private equity backed Software-as-a-Service (SaaS) companies. This post takes a closer look at these SaaS companies and explores the end industries they serve.
Private Equity Investments in SaaS Companies Over Time
The chart below shows the number of private equity platform investments in SaaS companies by year (I excluded add-on investments). As expected, there is a steep upward trend, although it should be noted that Q1-2019 (with 15 platform acquisitions) was not on pace with Q1-2018, which had 20 platform acquisitions in the SaaS space.
Caveat – many, if not most, SaaS investments are still earlier-stage venture capital investments, which we do not track. The chart below therefore only includes platform acquisitions by private equity firms.
Why is SaaS attractive to PE firms?
- High growth
- Recurring revenue (which speaks to quality of earnings)
- Scalable business models
- Asset-light companies that do not require significant capital expenditures to grow.
- Overall trend across all industries to harness data and streamline processes to enable companies to garner more intelligent business insights for more efficient and productive operations.
Which PE firms are most active in the SaaS space?
- Insight Venture Partners
- Summit Partners
- Five Elms Capital
- Vista Equity Partners
- Marlin Equity Partners
- Seventure Partners
- Warburg Pincus
- Riverside Company
- Providence Equity Partners
- Main Capital Partners
Industries Served or Functional Areas Covered
SaaS companies either provide an industry-specific solution or they focus on a functional area within a business, across industries.
Software as a Service – Industries Served
The chart below shows the industries served by currently-held, PE portfolio, SaaS companies.
It seems intuitive that industries such as Education, Healthcare, Financial, Retail, and Real Estate top this list. These market sectors are very process and data driven, lending to SaaS applications. What is surprising is that Education tops leads the list. One would think that Healthcare and Financial applications would tower over the Education market in terms of SaaS applications and adoption.
Software as a Service – Business Functions Served
Some SaaS companies do not target a specific industry. Instead, they provide a service for a business function, across industries. The chart below shows the relative focus across the various functional areas served.
For SaaS companies serving specific functional areas, Business Management and Human Resource tools top the list by a significant margin, followed by Marketing. Again, all three of these functional areas are very process and data driven.