Wrapping Up 2023: Software Retains Momentum in Q4
Panther Equity Insights -- a private equity newsletter covering all things IT & Telecom, Tech & Business Services, eCommerce and Markets.
Happy Wednesday folks!
Welcome back to the first edition of Panther Equity Insights for the new year! We’re excited for 2024 and the horizon ahead!
For all our new readers, our aim is to provide you with the latest insights and advancements in these verticals, along with valuable perspectives. We strive to create a newsletter that is informative and thought-provoking for all market participants.
This week we’re looking at:
The Continued Momentum of Software & SaaS in Q4
Industry Commentary on AI, private equity, and macro
Broader Market Chatter on Pitchbook’s latest Middle Market PE report
We’re Looking For Deals 🎯
Our team is focused on making investments within the IT Services, Technology Services, Business Services & eCommerce verticals. Along with our operating partners, we have decades of experience paired with a vast network of experienced executives and LP investors.
Size: EBITDA of $2 million – $12 million
Geography: U.S. or Canada headquarters
Target Transaction: Majority, significant minority, and structured equity investments
Business Profile: Founder or closely-held ownership with an experienced management team
Additionally, Panther is actively looking for ‘add-on’ investments that meet the following criteria:
Industry: IT Digital Transformation / Software Dev 💻
Size: Up to $3 million in EBITDA
Geography: Flexible
Target Transaction: Majority recapitalization
If you’re a Founder / Shareholder interested in working with Panther, or an intermediary with a deal to share — feel free to reach out and get in touch with us! We are happy to compensate fees to intermediaries & referrals at market levels.
Broader Market Chatter
Software & SaaS Retain Momentum in Q4
The software sector retained its strength throughout Q4 and found continued success in the SaaS model. The sector’s growth is showing no signs of slowing, with conditions setting the stage for another strong run by PE-backed software companies heading into 2024.
Deal activity, while not surpassing the frenzied highs seen in 2021-2022, surpassed pre-pandemic levels by a significant margin in 2023. Pitchbook’s latest Q4 software report finds that 2023’s deal activity is over 30% higher in value, at $152 billion, and 21% higher by volume compared to 2017-2019.
This is mostly due to the strength of the SaaS model with the recurring revenue base providing companies with stability while still allowing operators to reap the benefits of enormous digitalization tailwinds.
Across overall tech PE, software & software adjacent services are a dominant segment constituting almost 60% of both deal value and deal volume. This dominance establishes ‘software’ at the core of PE ecosystems, and a recovery in PE deal activity will bring outsized benefits to tech and software due to their pivotal role in the broader landscape.
This recovery could be as early as the first half of 2024, depending on when deal markets thaw and interest rate cuts begin.
Software Providers’ Margins are Rising
Most industries have faced compressing margins this year, but software’s EBITDA margins have steadily been increasing. How is margin expansion possible during times of tightening financials?
Despite constrained IT budgets, many companies in the software sector opted to maintain active go-to-market strategies. The rationale behind these decisions was often driven by a desire to protect market share and sustain growth in the face of economic uncertainties, along with the influence of frameworks like the "rule of 40."
As a result, operators were able to continue scaling with operating margins sustained, even surpassing levels observed during the heights of 2021-2022. The convergence of median and mean margin also demonstrates the maturity of the sector, as many participants are enjoying the sector's success rather than the wild range of outcomes tech companies saw in previous years.
With current valuation multiples roughly one standard deviation below the five-year mean, investors have even more attractive acquisition opportunities going forward, where they can capitalize on the sector's resilience and long-term growth potential at attractive prices.
About Us
Panther Equity Group is a private equity firm focused on making investments within the IT Services, Technology Services, Business Services & eCommerce verticals.
Our team and Operating Partners have decades of experience within our focus verticals along with a vast network of experienced operators and LP investors.
We have the Operational, Technology, M&A, Business Development, and industry-specific Strategy expertise to help companies accelerate their growth and reach their full potential. Learn more about Panther Equity Group by heading over to our website:
A Trusted Partner For Founders, Companies & Entrepreneurs
Industry Commentary
AI
📖 Worlds’ of possibilities in a multidisciplinary approach to AI
E-Commerce
📖 Small business bets big on ecommerce Private Equity
Private Equity
📖 Private equity exit troubles hit the middle market
Macro Update
🎤 Macro Update: The Flip Side of Inflation
if you’re a company Founder / Shareholder interested in working with Panther, a deal maker interested in connecting or with a deal to share, or an Operating Executive looking for a part-time, full-time, or a Board Level Role — feel free to get in touch with us!
Private Market Movements
Middle Market PE faces Slowdown, but Market Recovery still Anticipated in 2024
Software’s success is an anomaly to the overall market. Pitchbook's latest middle-market private equity report reveals a slowdown in PE megadeals trickling down to the middle market, with a three-year low in deal volume and a 26% decline in exit value. Despite this setback, the middle-market PE sector continues to perform well and attract fundraising.
The slowdown is attributed to a shrink in the supply of willing buyers and sellers in Q3 due to continued macroeconomic concerns, mostly driven by a 1% increase in the 10-year treasury yield. However, these paused deals are expected to resume following potential rate cuts, with a promising sentiment indicated by the Fed's decision to hold rates constant in December’23. Many institutions speculate 100bps of rate cuts throughout 2024, which will inevitably refuel PE activity.
Luckily, debt accessibility will not be an issue for the middle market, as private credit providers are actively servicing the sector.
About Panther Equity Group
Panther Equity Group is a private equity sponsor seeking to provide capital, strategic support, and resources to healthy & well-positioned private companies in the lower middle market. We typically focus on companies with $2 million - $12 million in EBITDA and seek to make majority or significant minority equity investments.