Sponsor-backed North America software companies most Likely to Exit

*Data current as of 5 February 2024

The Pipeline Explorer is a column discussing likely sponsor exit transactions based on Mergermarket’s Likely to Exit predictive analytics, which track when an exit could occur through M&A or a listing. This edition focuses on the software services sector.

Private equity deals in the software services sector—including divestments of long-held portfolio companies—are expected to see a ramp-up this year.

A TMT report last month by this news service noted that, although 2023 was a weak year as far as M&A activity in the sector—due to such factors as “congested syndicated financing markets”—this year is expected to see a higher turnout of deals. Easier access to debt, improved asset values and stabilized rates could spur more M&A, according to the report. David Humphrey, Global Head of TMT and co-head of the North America PE business of Bain Capital Private Equity, noted in the report that the firm has held “a number of productive conversations with bankers and PE firms exploring exits for portfolio companies.”

Long-held software companies with significant AI capability could fetch healthy multiples in the event of a sale this year, provided they have strong balance sheets, said Nathan Viehl, a partner at Thompson Coburn. He mentioned nearshoring—helping businesses move their manufacturing and production closer to their customer base—as an example of a hot market, adding that software groups serving that industry could be seen as attractive.

In September 2023, Arizona-based digital engineering services group Encora acquired Romanian software engineering services provider Softelligence for undisclosed terms, establishing its first delivery center presence in Europe and significantly boosting its global nearshoring footprint. In 2019, Warburg Pincus invested around USD 200m in Encora, then called Indecomm Digital Services; two years later, Advent International bought a majority stake for undisclosed terms, with Warburg holding a minority position.

A May 2023 report by this news service said that Encora, with an LTE-SB score of 17, was building up for an IPO but had no timeframe in mind because it was still in acquisition mode.

*Data current as of 5 February 2024

Mergermarket has reported recently on several software services groups backed for four or more years by PE or venture capital firms that are exploring exits or at least seeing a lot of buyer interest.

Sonatype, a software supply chain management services provider held by Vista Equity Partners since late 2019, has retained an undisclosed advisor to provide the Maryland-based company with “guidance on the markets and optimizing its outcome,” according to a December 2023 report by this news service. CEO Wayne Jackson told Mergermarket a year earlier that an IPO could happen as early as this year, but for this report, he said that event is probably “a couple of years out” given the state of the market, and that an interim financing in the meantime is more likely.

He also noted that Sonatype’s strong customer relationships and leadership in the field make it a valuable candidate. Sonatype’s LTE-SB score is 59.

BlueVoyant, a New York City-based cybersecurity services group that, on 29 November, simultaneously raised USD 140m in a Series E round and acquired cyber defense services group Conquest Cyber, expects to be ready for an IPO by next year, according to a December report by this news service. The company’s LTI score is 30.

Some PE-backed software businesses that have, for the time being, shelved their near-term exit plans, nonetheless acknowledge that they are in stellar shape for an exit and receiving buyer interest.

Last month, Mergermarket reported that Exterro, a legal compliance software group backed by Leeds Equity since 2018, was in acquisition mode and not currently seeking an IPO, despite having told this news service in July 2022 that it could weigh a public offering in 2023. It was considering this option even after a recapitalization/continuation vehicle transaction—also in July 2022—involving Leeds as well as secondary market investors Coller Capital and Glendower Capital and valuing the company at more than USD 1bn.

Exterro has an LTE-SB score of 19. Although the recent report said Portland, Oregon-based Exterro is “waiting for more [market] predictability in terms of inflation and interest rates,” CEO Bobby Balachandran said that both financial and strategic suitors are “circling” the business, which is profitable and cash-flow positive with “strong net customer retention.” Exterro, which made two acquisitions in 2023, plans to buy at least two more in 2024, ideally in Europe where “there’s a quintessential need around e-discovery and privacy, and digital forensic investigation,” Balachandran said.

Some private equity-backed companies are already on the market. In late January, this news service reported that Medsphere Systems, a healthcare information technology provider backed by Sixth Street Capital since early 2020, was in the early stages of a sale process with Lincoln International advising. Both strategic and private equity suitors are being targeted, according to the report.

Recent large PE software company exits in 2023 included Thoma Bravo’s sale of data security solutions provider Imperva to France-based Thales [EPA:HO] for USD 3.6bn, finalized in December; and the USD 4.6bn take-private of Virginia-based meetings, events, and hospitality tech provider Cvent, by Blackstone, Abu Dhabi Investment Authority, and Vista Equity Partners, which closed in June.