NEW YORK, March 18, 2020 /PRNewswire/ -- Zinnov, a leading global management and strategy consulting firm, released a comprehensive study titled, "Private Equity Investments in the Enterprise Software space," today. The study evaluated the US Private Equity (PE) landscape, with a specific focus on Enterprise Software, analyzing 2500+ PE transactions including buyouts, growth capital investments, and add-on acquisitions in Enterprise Software in the last five years across the United States. For each transaction, Zinnov has investigated 20+ data points including PE AUM (Asset Under Management), deal size, software verticals & horizontals, valuation multiples, add-on transactions, etc., to assess why Enterprise Software is emerging as the go-to vertical for investments.
Worries of a global recession are now being accelerated by COVID-19, and impacting a wide range of investment markets including private equity, leading fund managers to rethink their investment strategies. Traditionally, analysts have been tracking the 'yield curve inversion' and using it to predict the likelihood of a recession happening. In the last week of February, the spread between the 3-month and 10-year treasury securities fell to its lowest point since October 2019. For another inversion in early 2019, the Federal Reserve reacted with rate cuts, possibly delaying a recession.
Even in a market before COVID-19, private market favorites (Snapchat, Uber, Lyft) saw their stock prices drop significantly since going public, while WeWork's IPO plans fell through.
While these consumer and Internet-based software companies are struggling to find the right valuations, the recession-resistant fundamentals demonstrated by Enterprise Software companies have been able to generate strong returns for Private Equity players. In this COVID-struck bear market, we see Enterprise Software categories – collaboration software and EdTech – not just surviving but growing as they support remote working and digital learning. Collaboration leader Slack, landed a huge account post COVID-19 when IBM announced that it would roll out Slack to all 350,000 employees globally in mid-Feb to support remote working facilities.
Zinnov found that Enterprise Software investments by PEs crossed a staggering USD 121 Billion in 2019 alone. The largest deal was Ultimate Software Group being taken private by an investor group led by Hellman & Friedman for USD 11 Billion in May 2019. There were over 22 deals with deal values of greater than USD 1 Billion in 2019. The analysis revealed that the median deal sizes in 2019 rose to USD 238 Million, as compared to USD 203 Million in 2018. Further, larger transactions will take up a big portion of investments in the Enterprise Software segment in 2020, as valuations rise and limited partners evaluate co-investments to both de-risk and amplify returns.
PE firms are expected to broaden their range of Enterprise Software investments by creating dedicated venture and growth funds for investing in younger companies. In parallel, they will also partner with LPs to undertake large-size club deals to acquire established companies. PE firms are increasingly looking at efficiency and top line value creation for their Enterprise Software portfolio companies. Enterprise Software companies today, are deeply integrated into the Global 2000 companies and this integration has been further sealed by the current business environment, making these Enterprise Software companies an attractive target to invest in, in 2020 as well.
Pari Natarajan, CEO, Zinnov, said, "In 2019 alone, the dry powder in the US crossed a massive USD 1.4 Trillion, owing to which deal sizes and valuations witnessed meteoric rises. However, going forward, PE firms need to identify the target company's position in the digital maturity curve to prioritize high potential software categories such as RPA. With the ongoing COVID-19 situation, we expect accelerated growth of the RPA segment as companies across verticals try to improve their bottom line. Additionally, in our analysis of over 50 PE exits, portfolio companies having RPA, AI, or IOT capabilities exited at an average multiple of 8X (EV/S) and offered over 50% annualized returns as compared to an average multiple of 5X (EV/S) and 39% returns for the rest. Decisions, based on data and strong industry & company fundamentals, are what will hold both enterprises and investors in good stead as the uncertainty of 2020 plays out," he further added.
Founded in 2002, Zinnov is a global management and strategy consulting firm, with presence in Santa Clara, Houston, Bangalore, Gurgaon, and Paris. Over the past 18 years, Zinnov has successfully consulted with over 250+ Fortune 500 enterprises and large and mid-market Private Equity funds to develop actionable insights that help them create value – across dimensions of both revenue and optimization. With core expertise in Product Engineering, Digital Transformation, Innovation, and Outsourcing Advisory, Zinnov assists clients by:
Advising global PE firms in asset shortlisting and target evaluation, commercial due diligence, and value creation;
Helping global companies outline and drive their open innovation programs, design and operate accelerator programs, and enable collaboration with start-ups across specific use cases and predefined outcomes;
Enabling global companies to develop and optimize a global engineering footprint through center setups, and technology and functional accelerators to achieve higher R&D efficiencies, innovation, and productivity;
Growing revenue for companies' products and services in newer markets through account intelligence, market entry, and market expansion advisory;
Structuring and implementing Digital Transformation levers enabled by technologies like AI/ML, Cloud, IOT, and RPA.
With their team of experienced consultants, subject matter experts, and research professionals, Zinnov serves clients from across multiple industry verticals including Enterprise Software, BFSI, Healthcare, Automotive, Retail, and Telecom in the US, Europe, Japan, and India.