A narrow set of turnaround investors and strategic acquirers is emerging as the buyer base for stressed middle-market software companies that face uncertain prospects refinancing debt that matures in the next few years.

With the clock ticking, market participants are watching to see if transactions start to come together to allow lenders to avoid taking over companies that they are ill-equipped to turnaround.

The situation represents a big opportunity for funds who can handle complicated situations to acquire businesses with enterprise values of up to USD 200m, said Eugene Lee, a managing director at Lincoln International who advises distressed middle-market companies.

Business Development Companies (BDCs) held over USD 16bn of private credit loans to software and technology services companies that mature through 2028, according to Debtwire’s BDC database. Around USD 2.5bn of the debt that matures over the next two years was marked at below 95 by the BDCs as of 30 June.

Many software companies still generate cash and may not face near-term AI disruption risk but are caught up in a “triple whammy” as valuations have declined, interest rates remain elevated and maturity walls loom, said Lee.

Exploring a sale is one of the few avenues available to targets’ financial sponsors and lenders to address the situation, Lee said, though he cautioned that it remains to be seen how much buyer interest there is in such firms.

Across private credit and syndicated markets alike, lenders are pressing financial sponsors to inject capital when a business underperforms, said Alex Slusky, founding partner of Vector Capital, a private equity firm that buys distressed software and technology. “When lenders require new equity and sponsors are unwilling to provide it, a sale process can become the natural outcome,” he said.

Buyer universe

Suitors for such businesses need to do their homework and have strong operational skills.

“This is a market for sophisticated software investors that are deeply embedded in the vertical,” said Slusky. “Software tourists beware.”

Traditional sponsors are largely sitting on the sidelines, particularly for smaller standalone companies, which often fit better as add-ons to larger platforms, said Roopesh Shah, a senior managing director in Evercore’s liability management and restructuring group.

“There are not one or two logical strategic buyers, like there used to be with sponsors. For every company, the question is whether it fits a technical gap in an existing service offering, and that differs from one strategic to another,” Shah said.

On the larger side of the market, listed Italian software conglomerate Bending Spoons has emerged as a buyer of choice, snapping up enterprise and consumer tech groups like Airtable, Miro and Tractive at a discount and aggressively cutting costs to “reimagine” businesses.

Targets that find buyers tend to have real growth, a durable product and a clear reason to own.

Buyers are putting less weight on terminal value and more on current cash flow and near-term performance, Slusky said. Public software valuations have largely recovered from this year’s “SaaSpocalypse” drawdown, but “the AI discount has moved from the index to the individual asset.” Many companies facing 2027 and 2028 maturities sit at the wrong end of that split, he said, skewing toward generic workflow tools, seat-based pricing and thin proprietary data.

“Buyers no longer ask whether software is dead,” Slusky said. “They ask whether a given business is a system of record with data gravity, or a workflow layer an agent can bypass. That sets the value.”

“AI vulnerability is a product question, a valuation question and, ultimately, a debt-capacity question,” Shah said, and a company’s debt load has to leave room for the investment needed to keep its product competitive.

Neglect shows up in price

Once a technology company’s debt becomes unmanageable, “it usually has many other problems as well,” Slusky said. Owners underinvest in product and cut costs that impair the business, and the best executives leave once the upside is gone. By the time these companies reach the market, they are “almost always of lower quality than other technology assets,” he said, giving buyers real negotiating leverage.

The few software sales Slusky has seen at enterprise values between USD 100m and USD 200m were priced at around 1x-2x revenue.

Broader software M&A has recently averaged about 4x trailing revenue, and distressed assets trade at meaningful discounts, said Ryan Bennett, chair of strategic capital and restructuring at Willkie Farr & Gallagher.

Evercore’s Shah cautioned against quoting a single discount. “The deals that close tell you where conviction exists, not necessarily where the whole market is valued,” he said. Debt repayment, new capital and how proceeds are split among stakeholders can matter as much as the “headline multiple.”

Vector bought at that kind of discount when it agreed in May 2023 to buy Riverbed Technology, a network software company left with its lenders after a 2021 bankruptcy restructuring. Terms were not disclosed, and the lenders provided new financing at closing.

The lenders “had no idea how to run the company efficiently, make product development choices, or attract proven executives,” Slusky said, letting Vector pay less upfront in exchange for a share of any upside.

Lenders head for exit

Most distressed software sales begin with attempts to refinance or a liability management exercise, Bennett said. When those fail, the simple capital structures in middle-market software allow cheaper routes than bankruptcy: out-of-court workouts, assignments for the benefit of creditors and friendly foreclosures. Many such restructurings are helpful steps toward a later M&A deal, he added.

The best approach is to evaluate a sale, refinancing and restructuring together to preserve options, Shah said. Processes stall “when price expectations, debt claims and new-money requirements cannot be reconciled,” he said, adding that a deal needs “an executable capital structure,” not just an operating rationale.

Creditors who end up owning a business tend to sell, because they are not built to run it.

“Lenders can understand a car wash company or a dental company. They are much less comfortable owning a software company,” Lincoln’s Lee said.

Lenders don’t typically attract capable software executives, Slusky added. “They are far too stingy with upside and rarely speak the ‘language of Silicon Valley.’”

When a sale does come, its shape depends on how the company was built, Slusky said. Those assembled by acquisition are more likely to be sold in parts, though carve-outs “require a lot of patient planning on all sides, something that may be tough to do when you are in distress.”

Vector managed one such carve-out this year, buying Corel’s creativity and productivity software from KKR earlier this year, with proceeds used to repay a portion of the company’s debt. The deal let KKR hold onto the remaining asset, virtualization business Parallels, and fully address the debt.