What the developments in Europe and Asia’s software markets mean for private equity investors
If the modern technology sector has a heart, it is probably software. And in the M&A world that heart appears to be beating faster again.
Pitchbook’s Q2 2025 Enterprise SaaS M&A Review recorded that globally the sector had “roared back” with a 36.8% quarter-on-quarter rise in total deal value to US$58bn from 219 deals – putting this year on track to be better than the last for dealmakers.
But software may also have a touch of heartburn. The top 12 deals valued at over US$1bn delivered over three quarters of total deal value over a period where the average deal size was a mere US$92.4m. And while private equity firms seemed a lot busier with a new record estimate of 77 transactions in the second quarter, the total value of the deals they worked on fell by 15%.
“It feels like there are a bunch of software deals and there have been some big deals,” says one European technology investment banker. “But a lot of it has been a little bit smaller frankly…there are definitely going to be some US players doing a few things but [when we look at funds raised to target the European market] is there enough for these guys to do? Are there enough companies for them to buy?”
Software then has not yet quite managed to get market circulation going. But the ways in which the sectors’ dynamics have changed during the recent market downturn and the speed at which the technology is developing, suggests an adrenaline shot is coming.
Fragmentation and visibility challenges
Despite enthusiasm for software based on its now near ubiquity in most walks of life, it remains a deeply fragmented sector. What the European banker describes as a “very shallow and very wide” software sector in Europe, for example, has few continent-wide champions with exceptions like the German enterprise resource planning (ERP) software company SAP [SAPX:GER] a less active acquirer.
In Asia, a region that has developed and adopted new technology so fast that innovations like QR code payment are threatening the stranglehold of US credit card companies on the payment terminal market, the problem seems to be visibility.
“Unlike Europe or America, where markets are mature enough for startups to list and tell their stories, we don’t see a very mature market in Asia,” says Vincent Chin, an executive who sits on the boards of southeast Asian software and fintech companies. “Yes, you once in a while have your Gojeks (an Indonesian digital payment group) or Carousell (a Singapore-based online marketplace) but there is a disparity of information which makes it difficult to know where startups are coming from”.
What this means in both regions is that a plethora of start-ups or lower mid-market companies jostle for position servicing different often sector-based niches or as regional/country champions on the basis that these niches/regions may be less well suited to a one-size-fits-all approach or are not at any rate as mature as the more general purpose areas on which SAP and its big US rivals like Microsoft, Oracle and Salesforce focus.
The small-ticket startup nature of so much of the industry and indeed the constant advance of the technology itself has made it a difficult play for private equity and while tools like ARR-financing (see box/primer) had in markets like the US and Europe been a way of getting around some of these concerns, there is a sense that the more conservative approach investors have felt obliged to take in recent years may have compounded the problem.
“ARR-based financing became popular in the 2021 timeframe when growth at all costs was acceptable,” the European banker says. “ARR-based debt may be a little less relevant now because people are more focused on gaining profitability early”.
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Chin suggests the very different way in which companies seek funding in Asia means that ARR-financing is a lot less relevant and can also make it difficult for private equity funds to enter the market. With peer-to-peer financing popular across the continent and equity crowd funding widely used in Malaysia and Singapore private equity investors looking to get a foothold in these regions need to adopt a different approach. “For US or Europe investors, meeting these investors or getting involved in their projects is the fastest way,” Chin says. “But recognising the niches is a challenge.”
One of the newer areas where Asian software companies could potentially get greater visibility is through their widespread adoption of artificial intelligence (AI) which Chin says is helping a lot of business quickly scale up to western standards. He points to the construction of massive data centres in Malaysia to cater to demand and the country’s recent push to construct a framework for AI.
But in western markets, the renewed focus on profitability and return on investment has combined with a recent increased scepticism about the ability of technology to increase revenues. “In some cases the jury is out and it is too early to tell,” says the European technology banker. “In others it’s a case of whether AI can enhance the product and its stickiness with narrow and bespoke AI functionality. But there is a cost there too because you have to have someone design that product”.
It is perhaps partly for these reasons that the majority of the software deals which have been done have been done by corporates less concerned by short-to-medium term profitability of their targets or by carefully assembled PE-backed corporate platforms. For recent a recent examples we need look no further than global consulting firm Accenture whose focus on AI has notched up around 30 deals around the world so far this year, or Hg-backed Scandinavian group Visma, which over the same period has acquired 13 smaller companies in Europe and Latin America as it continues on its mission to become a “mission-critical provider of cloud software”.
Shifting strategies and the road ahead
Future deal flow in Europe could come from the unwinding of such platforms as seems to happening at Sweden-headquartered Hexagon [HEXA-B], which after building its business with around 30 acquisitions over the last 27 years last month agreed the EUR 2.7bn sale of its Design & Engineering business to US group Cadence and fleshed out the spin-off next year of its asset lifecycle intelligence and safety, infrastructure & geospatial divisions under the Octave name. Hexagon president and CEO Anders Svensson said the move as part of a plan to “simplify and focus our portfolio” chairman Ola Rollén said it would strengthen the company’s “financial flexibility”. Some European market observers have detected a trend which may also be shown by UK energy group Octopus’s announcement that it would spin off its software arm Kraken which could be worth US$10bn.
Chin suggests that Asia needs to find a way to move to a pan-regional form of technological and financial regulation to create the standards that could make local technology investments more appealing for longer term investors. While Asian technology companies and investors are in his experience not really looking at investing themselves in European software and are opening operations in the US largely because of the Trump administration’s tariffs, any investor looking for a prospect in Asia will need to find a company that has a strategy that can face towards customers in all markets.
“If you want to come in here, look at startup development not just for the West but how it is entering the booming market of China,” says Chin. “You need a plan for the west and China for more than just a domestic or one country market. The young gen Z are thinking of both sides”.
