Get your free personalized podcast brief
We scan new podcasts and send you the top 5 insights daily.
To justify high valuations for SaaS companies, private equity sponsors would contribute larger-than-usual equity checks (e.g., 40% vs. a typical 20%). This gave lenders a false sense of security, persuading them to extend significant leverage on businesses whose enterprise values were already inflated.
Related Insights
A "tuck-in" acquisition, where a PE firm buys a smaller company to merge into a larger portfolio company, shouldn't be underestimated. The strategic value to the existing platform can be so immense that the PE firm is willing to pay a premium multiple, often exceeding what a standalone strategic buyer would offer.
Contrary to popular belief, the primary buyers for mid-market B2B SaaS are not competitors (strategics) but private equity firms. They acquire companies as platforms or as "tuck-ins" to their existing portfolio companies, making them the most dominant force in this M&A landscape.
The shift to financing software-as-a-service (SaaS) companies fundamentally altered private credit's risk profile. It moved from lending against hard assets with recovery value (e.g., equipment) to lending against intangible assets, where the recovery value in a bankruptcy scenario could be virtually zero.
PE firms lever up SaaS companies, creating debt that requires predictable, high-margin cash flows. This prevents them from cutting prices to retain customers against new AI-native competitors. Their primary lever (raising prices) has now become their biggest vulnerability.
In private markets, there's a perverse incentive for both private equity owners and private credit lenders to avoid marking down asset values. This "mark to make-believe" system keeps valuations artificially high, hiding underlying financial stress and delaying the recognition of losses.
Contrary to the popular belief that strategic buyers dominate, 70% of B2B SaaS acquisitions between $2M and $20M ARR are made by private equity firms or their portfolio companies. This makes the market opaque for founders, who often receive bad advice and undervalue their businesses by not understanding the primary buyer class.
Unlike public companies, highly leveraged SaaS firms bought by PE face a brutal reckoning. With no growth to pay down debt, they must slash headcount and R&D. This leads to a long, nasty grind of declining quality and market relevance, even if customer inertia keeps them alive for years.
Private market valuations are benchmarked against public multiples. Currently, public SaaS firms with 30% growth trade at 15-20x revenue, twice the historical average. If this 'bedrock price' reverts to its 7-8x mean, it will trigger a cascade of valuation drops across the private markets.
While leverage multiples are similar across the market, Neuberger targets companies acquired at high purchase price multiples (avg. 17x). This strategy results in a significantly lower loan-to-value ratio, providing a larger equity cushion and reducing the lender's ultimate risk.
Software PE has gone from a niche to a crowded market full of generalist investors, or 'late-cycle tourists,' who keep valuations high. These firms lack the technical expertise to properly assess new risks like AI readiness, leading them to either overpay or kill deals based on superficial tech diligence reports, creating market instability.
