LONDON, Feb 25 (Reuters Breakingviews) - Enterprise software was once private equity’s safest bet: recurring revenue, high margins, predictable growth. Artificial intelligence is now challenging each of those assumptions, undermining an investment binge that peaked at over $220 billion in 2021. And, as Blackstone (BX.N), opens new tab and now UK-based Hg are finding out, the software selloff is now also making it harder to return capital to investors.

Visma illustrates the bind. The enterprise software group, owned by Hg for two decades, is now likely to delay its mooted 26 billion euro IPO until at least April 2027, a person familiar with the matter told Breakingviews. The BVP Nasdaq Emerging Cloud Index has fallen 25% this year, and Visma’s closest rival is struggling: Intuit is down 46% year-to-date. Blackstone-backed advertising technology company Liftoff Mobile on February 17 delayed its U.S. IPO.

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The sector’s problems come from two directions. First, fundamentals were softening even before the rout. Private equity-backed software groups’ revenue growth rate slowed to 10% last year from 27% in 2021, according to Bain & Co data, opens new tab. Second, artificial intelligence is unsettling the business model itself. Investors once prized seat-based subscriptions for their predictability. But if automation reduces headcount, charging per user makes less sense, forcing private equity-backed vendors to shift to hybrid pricing models based on outcomes. AlixPartners estimates, opens new tab such hybrid models could account for 40% of software revenue by 2026. And if AI improves efficiency, it can also compress billable activity. The result will likely be lumpier, less valuable cashflows.

Fear of disruption is compounding the pressure. Anthropic’s rollout of Claude CoWork reinforced concerns that AI systems can replicate many of the services that software groups currently offer, eroding incumbents’ moats. Some of that anxiety is overdone, as large customers rarely rip out core systems overnight. Even so, software companies now need time, and clearer disclosure, to prove that AI will help their business, rather than replace it.

That will all make it hard for any private-equity-backed software group to list, even a seasoned company like Visma. Sponsors can hold onto assets for longer or try to sell them to each other. But that all lessens the money that can be returned to the insurers and pension funds that have historically backed buyout funds. Bain & Co reckons private equity firms have about $3.8 trillion of stuck assets waiting to be sold.

Waiting may not guarantee relief. By 2027, AI challengers like OpenAI, Anthropic and Mistral may have grown further, and the market’s tolerance for technology businesses may have shifted again. For buyout groups, the software IPO window may stay shut for a long time.

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Context News

• Hg-backed software group Visma will push back its plans for an initial public offering until at least April 2027, a person familiar with the matter told Breakingviews.
• Visma considered an IPO in 2023 but instead raised capital in a private share sale that valued it at around 19 billion euros ($22 billion).
• The current market volatility of software stocks has shifted investor expectations and software companies now need additional time to prove they can sustain revenue growth or demonstrate that they aren’t being disrupted by AI startups like Anthropic, the person said.

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Editing by Neil Unmack; Production by Shrabani Chakraborty and Oliver Taslic

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Karen Kwok

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Karen is a columnist focusing on global technology and venture capital sectors, writing stories about artificial intelligence, fintech, and semiconductor companies. She also covers deals in the Middle East region and global metal mining sector. Prior to Breakingviews, she was a European gas and power reporter at S&P Global Platts in London and covered funds and equities at Morningstar UK. Karen also briefly worked at Bloomberg. Born and raised in Hong Kong, she is fluent in Mandarin and Cantonese.

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