New data from Hampleton Partners on enterprise software M&A has some surprising takeaways on the outlook for deal multiples and sought after sectors as the world inches into a post-Covid future.

Private equity continues to lead league tables for enterprise software acquisitions well after the dealmaking catch-up spree late last year. In the first half of 2021, sponsors constituted a record-breaking 44 percent of deal volume. Surprisingly, private equity continues to focus on areas that saw spikes in interest during Covid’s surge. “For instance, in the education management and e-learning software verticals, every target was bought up by a financial buyer,” the Enterprise Software M&A market report reads.

In fact, the everacquisitive Thoma Bravo leads enterprise software deal volume with 19 transactions in the previous 30 months, including clinical trial payment software provider Greenphire’s acquisition from the Riverside Co. earlier this year.

The valuation dissonance limited partners warned about earlier this year is beginning to become visible in the data as well—buyers are paying up at higher multiples to revenue than net earnings. The median ratio of enterprise to sales reached 4.7x in 1H21, up from 3.4x the previous half. Meanwhile, the median EV to earning before interest, tax, depreciation, and amortization fell to 13.7x in a gradual decline from 2H19’s high of 17.2x. Investors appear willing to pay up for companies that have yet to demonstrate profitability.

That spend is concentrated in integration, collaboration, and enterprise resource planning software categories. Enterprise applications constitute 34 percent of deal activity in the first half, with information management companies working in data migration and document management, for example, notching 21 percent of transactions.

Buyers appear to betting that a hybrid working model is here to stay, and on the valuation front, are prepared to shell out for future profits.

Brandon Zero