Call it the “software big leagues.” The deals are bigger — measuring into the billions. The stakes are higher — successful acquisitions can reshape entire sectors. And the players are more ambitious — strategic buyers want to supercharge innovation, growth, and profitability by acquiring software firms that can bring all three at once.
It would be a mistake to let short-term market fluctuations distract from these secular trends. The pandemic caused a bubble in SaaS valuations in 2021, distorting the baseline for recent comparisons. In 2024, SaaS revenue growth has moderated, as customers deal with macroeconomic uncertainty and how to navigate the shift to AI tools and products (many of which, of course, will be built and delivered by SaaS businesses). These are just ripples on the wave that has been building for decades.
Private equity firms operating in the software market recognize this and have been training for the big leagues since 2000. They see software not as a discrete sector, but as the new foundation upon which businesses in the modern era are built.
That vision has become today’s reality. Spending on software is expected to grow roughly twice as fast as other categories such as financial services and healthcare tech, and software is expected to account for more than half of all growth in tech out to 2027. Fast growing valuations reflect that appetite.Estimates project this year’s SaaS market to be approximately $247.2 billion, compared to $102.1 billion in 2019 ($125.2 billion after adjusting for inflation), representing an average compound annual growth rate of about 19 percent over that period. There will be faster and slower growth rates year on year, but it is hard to see a reason why the overall trend should do anything other than accelerate.
And so too grows the amount of cash it takes to buy these software businesses. Applying a normal market premium to the value of the median public SaaS company based on revenue — and assuming a modest amount of financial leverage — implies an equity check of approximately $4 billion.
A quick back-of-the-envelope calculation: if the average Internal Rate of Return on that investment is about 22 percent, and the company remains in the portfolio for five years, the target exit — even without multiple expansion or additional equity for acquisitions — would be around $10.8 billion. That’s a very big number. But when the entire industry is growing revenue at approximately the target IRR of a private equity firm, and software companies are increasingly acquisitive, the result comes as no surprise.
So who buys at that price? The answer is changing and not just because of the value. Private equity firms like Thoma Bravo aren’t only selling our software portfolio companies to other software companies; our deals now cater to a wider range of strategic acquirers across many sectors. Look no further than recent sales to companies in financial services (Nasdaq, Intercontinental Exchange), diversified industrials (Roper, now one of the largest application software companies in the world), and materials (Heidelberg).
And the pool of potential acquirers that can absorb an $11 billion acquisition is as deep as it is wide: currently, over 600 public companies have market caps exceeding $33 billion, enabling them to acquire $11 billion companies at a 3 to 1 ratio. Recent years have seen a number of such exits. In 2021, Analog Devices ($54 billion market cap) snapped up Maxim Integrated for over $20 billion; in 2023, Nasdaq ($23.9 billion market cap) bought Adenza for $10.5 billion; and in 2024, Synopsys ($78 billion market cap) acquired Ansys for approximately $35 billion. Come 2029 — when today’s private equity acquisitions would typically be primed for exit — the pool of strategic buyers will likely grow even larger.
Deals at this size certainly mean greater stakes. The amount of capital at risk in each investment may feel hard to swallow. But strategic acquirers across industries increasingly are telling us that the more profound risk lies in not making this type of investment when the moment is right. Those companies — particularly public companies managing quarterly earnings —appreciate the long-term value of recurring revenue. So too do they appreciate the urgency of digital transformation for themselves and their customers. With a strategic software acquisition, they can initiate transformational change from within the business while bringing in a reliable new revenue stream from outside of it — a twofer that many large companies can’t afford to pass up. This puts private equity firms with a track record of scaling software businesses to significant sizes ($10-billion-plus) in a strong position to capitalize on this demand and realize outsized returns for their investors.
And in a world where growth-at-all-costs is no longer the primary driver of company valuations, the target company’s financials and business processes matter more than ever. That’s why there’s such a huge premium for profitable software companies: Strategic acquirers benefit from buying a company that is already operating efficiently, primed for integration, and beneficial to their bottom line. All that saves them time as they work to keep up with the breakneck pace of innovation. Because just as size matters in software’s big leagues, so does speed.
While today’s markets are markedly different, and the neck-turning numbers will take some getting used to, I see it as a sign of a healthy dealmaking environment — for those willing to adjust. The growing software sector, increasing diversity of acquirers, larger deal sizes, and ample acquisition capacity among strategic buyers all point to bigger opportunities for software companies and investors alike. When you see the next $11-billion-plus deal for a software company you may have never heard of, you’re seeing signs of what it's like to play in the big leagues.
Holden Spaht is a managing partner at Thoma Bravo based in San Francisco.
