While venture capitalists are waiting for the tech IPO window to crack open, buyout shops are having a field day taking public software companies private.
Three of the five top software deals in the U.S. this year have been take-private transactions, according to data from FactSet. Two were announced last week and the other was in April. The three targets — Qlik Technologies, Marketo and Cvent — sold for a combined $6.5 billion.
It's a brave new world for private equity.
Known for aggressively pursuing job cuts and office closures with debt-fueled deals, leveraged buyout firms are now banking on businesses that are still expanding but have fallen out of favor with Wall Street. They're playing into the trend of web-based applications and the software as a service (SaaS) delivery model, which is rapidly displacing legacy packaged software.
Gartner predicts the SaaS market will grow 20 percent this year to $37.7 billion, while worldwide IT spending as a whole is increasing only 0.6 percent. To make healthy returns on their investments, private equity firms now have to prove they can juice growth.
"The old wave of software LBOs was more about cost-cutting," said Owen O'Keeffe, head of West Coast technology M&A at Morgan Stanley, which advised Cvent, Marketo and Qlik in their sales. "This wave will be more about continuing to invest in growth with some cost optimization."
Private equity isn't without competition in the cloud consolidation war. Salesforce.com agreed last week to buy e-commerce software provider Demandware for $2.8 billion, CEO Marc Benioff's biggest purchase ever. Oracle announced plans in the last three months to spend $1.2 billion on Textura and Opower.