Private equity firms are starting the year 2024 with a record 2.59 trillion dollars in uninvested capital commitments from their investors – known as "dry powder" in industry jargon. Given the unprecedented geopolitical uncertainty, it is hardly possible to predict whether M&A deals will make a comeback this year. After a year in which the number of mergers and acquisitions fell below 3 trillion dollars for the first time in the past decade, there are only a few encouraging signs that the number of transactions will increase in 2024. However, financial investors can no longer rely on inflating their returns with cheap borrowed money alone; they must return to their roots by securing good deals and making operational improvements.

This is especially true for private equity investments in software companies. The resurging M&A activity in the software industry is dominated by financial investors: "Of 3,000 software deals in 2023, 1,500 were private equity deals," write the bankers from the Boston-based tech investment boutique AGC Partners in their annual report. "Tech private equity firms have taken 91 listed software companies with a total value of 300 billion dollars off the stock market in the past three years, and now there are only 150 publicly traded software companies left."

Competing Bain Capital, which was unsuccessful in the acquisition of Software AG in Darmstadt and Softwar One in Switzerland, is competing against rival Hellman & Friedman for the acquisition of Docusign, an online signature services provider with a market value of around 2.5 billion dollars. The two private equity firms are among the final bidders in the auction for DocuSign, whose acquisition could be one of the largest buyouts of 2024.

In Germany, specialized software financial investors include Thoma Bravo, PSG Equity, and Main Capital. Software dominated the buyout scene in Germany last year: Darmstadt-based Software AG was dissected by Silver Lake, while exclusively equity-operating Thoma Bravo acquired listed Munich-based compliance specialist EQS AG, and EQT bought back Linux provider Suse from the stock exchange.

Slightly less publicly noticed were the growth investments: US growth investor PSG Equity invested 100 million euros last year in Sport Alliance, a software company in the fitness industry based in Hamburg. Israeli venture capital investor Pitango led a 100 million euros financing round for Berlin-based healthtech startup Patient21. Asset management giant Blackrock placed 30 million euros in Berlin fintech Upvest.

Software investor PSG has just closed its second European fund with over 2.6 billion euros. "Investments will continue to be made in Germany from this fund," says Christian Stein, Managing Director responsible for Germany. "Germany offers growing investment opportunities in software solutions needed for the digitization of the German economy. We see significant investment opportunities as companies of all sizes and in all industries increasingly use digitization and automation tools to improve customer service, increase productivity, and secure their operations." PSG sees Germany as a "core market" and has made three other platform investments in addition to Sport Alliance – in cloud security provider Hornetsecurity, billing software Billwerk+, and cemetery software specialist Rapid Data.

In software deals, size is not necessarily the determining factor. The slightly smaller PSG rival, the Dutch Main Capital, is the smallest of the three software-focused private equity firms particularly active in Germany, with a managed volume of €2.2 billion. Nonetheless, it is also the most active.

According to the Private Equity Tech Deals report from Boston-based investment boutique AGC Partners, Main Capital is number 4 globally in the number of tech and software deals last year. Over the past five years, the Dutch, who have an office in Düsseldorf, have been number 3, and PSG Equity is number 4. Main Capital was uncontested number 1 in exits: Among other things, the majority of shares in German software company GBTEC were sold to US private equity giant Carlyle. The Bochum-based company was valued at around €200 million in the deal.

Through add-on acquisitions, Main Capital is expanding the banking software specialist Foconis: "Under the roof of Foconis, we have now merged a trading platform, a payment platform, and a data analysis tool for compliance," states Sven van Berge, Managing Partner responsible for the German business. "This establishes a comprehensive solution for banks centered on a core banking system – which Foconis does not offer." Customers include savings banks, cooperative banks, and private banks, as well as some major banks.

Main Capital focuses on software companies that grow profitably. "We try to strike a balance between growth, customer satisfaction, and employee satisfaction," notes van Berge. "Recurring revenues are attractive in software companies. If revenue is more predictable, you can also plan investments better. Although Germany lags behind in cloud adoption, the business is growing fastest here in all of Europe."

In addition, the record capital injection of 463 million euros into artificial intelligence startup Aleph Alpha in November, with significant involvement from Lidl-founder Dieter Schwarz's company Schwarz Digits, has further fueled the AI hype. "AI has an impact on all other software areas," says van Berge. "You have to consider how AI can be integrated into your own software."