The private equity (PE) industry is struggling to exit its investments as software valuations fall due to artificial intelligence (AI). Cases of holding investment assets for at least nine years are increasing, compared with the typical three to five years. As investor concerns deepen over AI's impact on the software industry, portfolio companies that cannot be sold are piling up.
On the 8th, The Wall Street Journal (WSJ) reported that buyout funds would take about nine years to clear the backlog at the current pace, citing an analysis of PitchBook data released last month by PricewaterhouseCoopers (PwC).
According to data released by PitchBook that day, private equity firms held about 13,500 U.S. companies as of the 30th of last month. This was a slight increase from about 13,300 at the end of last year. Of these, nearly 4,000 companies had been held for more than six years, and 1,500 companies had been locked up for more than nine years.
Private equity firms have typically set their investment periods at three to five years. But as holding periods lengthen, some investors are shifting their funds elsewhere. Private equity fundraising in the first half of this year reached $159.6 billion (about 240 trillion won), projected to end up similar to last year's total of $308 billion (about 462 trillion won). The number of funds raising capital declined. Capital is concentrating in large, established managers.
"Piling Up Like a Mountain"...PE Software Assets Have No Buyers
Private equity firms bought software companies in large numbers in 2020 and 2021. But as earnings outlooks worsened and debt increased, they have run into difficulty with exits. According to PitchBook, only about 1,200 of the total 13,500 companies are software firms. But a significant number were acquired at high valuations, tying up a large portion of fund capital.
The debt of these software companies had been accumulating even before the so-called "SaaS-Pocalypse." The SaaS-Pocalypse refers to the situation earlier this year in which the corporate values of comparable listed software companies plunged over concerns about the risks AI poses to the software industry.
Many companies took out loans expecting rapid growth to continue amid the remote-work boom during the pandemic. Private equity firms holding them find it difficult to sell at sharply lower prices. Darius Craton, director of private capital advisory at Raymond James, said, "Assets bought in 2021 are the hardest to sell right now because of the difference between valuations then and now," adding, "There is a mountain of inventory piling up that will have to be dealt with someday."
Private equity firms are turning to the secondary market and so-called "continuation vehicles." This approach gives fund investors a chance to recover their money while allowing managers to continue holding and managing the assets.
As selling investment assets becomes more difficult, private equity firms are also favoring initial public offerings (IPOs). According to Preqin, private equity firms listed 16 companies in the first half of this year, raising $10.1 billion (about 15 trillion won). This was the largest half-year amount since the market cooled at the end of 2021. Craton said, "The IPO market needs to recover its health," adding, "Otherwise, we are just delaying the problem."
Many of the IPOs that drew attention this year were AI-related companies or defense industry companies. There were exceptions. Last week, Bending Spoons, a technology company that acquired brands including AOL, raised $1.68 billion (about 2.5 trillion won) through its listing, and its stock jumped 40% on its debut day.
