Private equity tech deals plummet 70% as investors worry AI will shake the value of software companies.

Private equity tech deals plunged 70% in the first quarter of this year, as investors worry that AI will shake the value of software companies. Meanwhile, Bain & Co. points out that the industry isn't lacking capital, but is facing a crisis of confidence.

June 8, 2569 at 19.10:XNUMX a.m. Bloomberg News reported that The value of technology acquisitions by private equity funds worldwide has plummeted since the end of last year. Investors are becoming more cautious in valuing technology companies in an era where artificial intelligence (AI) is rapidly transforming business models, according to a recent report by Bain & Co.

Data from a report citing Dealogic's database indicates that global buyout deals fell by 70% to just $20,000 billion in the first quarter of this year, due to a significant decrease in large-scale deals. Meanwhile, the valuation of software companies declined by an average of 8% during the same period, compared to a decline of only 0.3% for businesses in other industries.

The private equity industry has faced challenges for years from its inability to sell assets for more than its initial investment and to return investors on target. The arrival of AI is adding further pressure, particularly on software companies, which are being questioned about the viability of their traditional business models in the future.

Rebecca Burack, Head of Global Private Equity at Bain. The industry has just recovered from the impact of President Donald Trump's trade war, but is now facing new negative factors, including the SaaSpocalypse (a decline in investment in Software-as-a-Service), concerns about the private credit market, and soaring oil prices due to the Iran-Iran conflict.

"It feels like we're facing the same situation again for the second year in a row." Burack said.

However, Bain believes the current situation does not reflect a structural problem in the market, as the global economy continues to expand, stock markets remain strong, liquidity in the financial system remains high, and private equity funds have a large amount of cash waiting to be invested (dry powder).

"We don't have a problem with funding, but rather a problem with confidence." Burack said.

The report states that private equity funds need to adapt to the AI ​​era by assessing how the businesses they invest in will be impacted by this new technology, and by incorporating AI as a key factor in their new investment decisions.

Meanwhile, another major problem is that asset liquidation from investment portfolios remains limited, with the industry facing historically low levels of investor payouts relative to net asset value, and many companies stuck in portfolios without finding buyers.

Burack stated that the average holding period for funds has increased to 6-7 years, from just 3-4 years during the boom of the private equity business. While in the past, achieving a 2.5x return on investment required an average annual profit growth of only 5%, now a growth rate of up to 12% per year is needed to achieve the same level of return.

Although high-quality assets continue to attract buyers, older assets with uncertain future growth potential and excessively high valuations remain difficult to sell.

Even continuation vehicle transactions, which have become increasingly popular in recent years and allow funds to move companies from existing funds to new ones to extend investment horizons, are starting to face pressure as institutional investors or limited partners begin scrutinizing these transactions more closely.

The report also stated that most companies in the Buyout fund's portfolio were acquired in 2021 or earlier, a period when company valuations were very high, making it increasingly difficult to find buyers today.

Burack believes that what the market needs most right now is clarity about the direction of the economy.

“You can generate good returns in many economic conditions, but it’s crucial to know what kind of game you’re playing… Investors need to understand the economic environment in which they are planning to invest, because once you know the rules of the game, making investment decisions becomes much easier.” she said

In summary, Bain views the current problem for the private equity industry as not a shortage of capital, but rather uncertainty about the impact of AI and the future direction of the economy. This is causing investors to delay decisions and resulting in a continued sluggishness in the equity market.

refer : bloomberg.com

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