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Private equity takeovers of software groups are at a turning point as investors hunt for bargains among companies at risk of being disrupted by AI, the co-founder of one of the buyout industry’s biggest players has said.
The valuations of software companies collapsed earlier this year amid fears about how AI will disrupt their businesses. However, markets have underestimated its potential to help many companies become more efficient and grow faster, according to Dipanjan “DJ” Deb, co-founder of Francisco Partners, a technology-focused private equity firm with $75bn in capital raised.
“AI will not kill the software industry, but it will create a dispersion of winners and losers. For some companies, their [long-term valuations] are permanently impacted, but for others people will realise that not only do they have strong moats, but they will be able to have a greater market to sell to,” Deb told the FT.
His comments come as the San Francisco-based firm completed the first large fundraising for a software-focused PE group since AI worries fuelled a February market sell-off.
Francisco Partners raised $21bn in new cash since the beginning of the year in a fundraise that exceeded its $18bn target. Kirkland & Ellis advised on the capital raise.
The firm was set up by Deb and a group of investors including the late technology banker Sanford Roberts in 1999. It held a first close for the fundraising following February’s “SaaS-pocalypse”, in which software valuations tumbled after the release of Anthropic’s Claude Code AI tool raised fears about the future of many tech firms.
The successful fundraising underscores some institutional investors’ willingness to plough new cash into a sector where takeover multiples have fallen and growth rates and profit margins may now be underestimated, according to Deb.
“If you look at the history of private equity, when you buy right, you tend to make a lot of money — and valuations are at their lowest level in a long time,” he said.
While Deb conceded that some of Francisco Partners’ tens of billions of dollars in software PE investments “will have issues by virtue of what’s happened”, he added that “there should be great opportunities”.
The veteran technology investor, whose portfolio includes cyber security firms Barracuda Networks and Jamf, predicted that while vintages of private equity funds raised in 2021 and 2022 will struggle after deals were struck at heady valuations, the coming funds in the industry could be strong performers.
Francisco Partners has been among the PE industry’s fastest-growing firms over the past two decades, growing from just a few billion dollars in assets into one of the $4tn industry’s largest players and matching a trajectory of specialist rivals such as Thoma Bravo and Vista Equity Partners.
However, Francisco Partners is the first large-cap software investor to close a fundraise since markets were disrupted earlier this year.
The firm’s funds have historically been among the industry’s strongest performers. Its 2011 and 2015-era funds returned more than three times investors’ original commitments, according to filings from California pension funds.
Francisco’s newer 2018 fund has already returned nearly 100 per cent of investors’ cash and generated a net internal rate of return of 18.4 per cent, according to the filings.
Deb said credit markets remained open to funding software buyouts but the cost of financing packages had risen, reflecting investors’ uncertainty over AI risks and some retail-focused credit funds lowering their new commitments.
He also warned that investors had grown overly excited about the future of AI companies, whose valuations have soared to unprecedented levels, and underestimated the risk that some companies would fail — just as some internet start-ups such as Netscape did in the dotcom era.
“I think we’re sitting on a massive AI bubble. This reminds me of 2000,” Deb said.
