FAR FROM BEING THE TERRIBLE YEAR THAT INVESTORS FEARED AT THE OUTSET OF THE PANDEMIC, 2020 TURNED OUT TO BE A PIVOTAL ONE FOR ONLINE SHOPPING, COLLABORATION, AND VIRTUAL EVENTS. UNDERPINNING IT ALL WAS THE SOFTWARE SECTOR, WHICH IS NOW HOTTER THAN EVER.
Software was always crucial to running businesses before the COVID-19 pandemic upended global commerce. After the pandemic forced many industries to quickly adapt to a remote-only work environment, it became even more important.
The result was a dramatic acceleration in the adoption of e-commerce software in mid-2020 that surprised even sector specialists like Deven Parekh, managing director at Insight Partners.
“You had five to 10 years of e-commerce adoption that happened in two quarters,” Parekh said during a virtual panel on software technology at the RFK Compass Spring Virtual Investor Summit in March (RFK hosted the panel on virtual event platform Hopin—one of the many online collaboration software companies that saw a surge in adoption during the pandemic).
The growth spurt came from retailers like Walmart making billions of dollars of investments in their information technology immediately after the onset of the pandemic in March 2020 instead of spreading them out over several years, Parekh said.
Nor was e-commerce the only corner of the software market that saw a dramatic uptick. Software products enabling online collaboration, such as Hopin, saw their adoption rates accelerate as entire industries sought new ways of doing business. So did software for online security, such as two-factor authentication, and information technology platforms for healthcare, just to name a few.
The result is that 2020 proved to be a far different year than what many software investors feared at the outset of the pandemic. With businesses shutting down due to lockdowns, Parekh initially warned his limited partners that Insight might have difficulty deploying capital in 2020. Instead, the accelerated pace of software adoption only provided more deal flow and Insight closed its largest growth equity fund at $9.5 billion in 2020. The goal of the fund is to “help game-changing technologies transform the way we live and work,” Insights said in an April 2020 letter to stakeholders.
In California, Behdad Eghbali’s software-focused team at Clearlake Capital Group accelerated its pace of investment. Eghbali said Clearlake deployed billions of equity capital in the first 60 days of the pandemic and has since been able to continue that momentum. Most of that focused on businesses hit by the pandemic as Clearlake pivoted from buyouts to making credit investments and rescue financings.
“We’ve been able to go in overdrive mode,” Eghbali said. Far from being the terrible year he feared at the outset of the pandemic, Clearlake’s portfolio saw one of its best-performing years.
Such trends have solidified investors’ belief that software is a sector which—though not immune from economic shocks and recessions—provides some degree of protection thanks to its mission-critical nature. “We always believed that software was a very resilient market but I think we probably under-estimated its resilience,” Parekh said.
That resiliency has also attracted more competition for deal flow, which in turn has helped bid up companies’ valuations. As a result, it’s more important for investors to think creatively about how they can create value in the sector through operational improvements and other strategies, according to Gero Wittemann, partner at Hg in New York.
“We’ve got to make these companies better. That’s our responsibility and that’s how we succeed,” said Wittemann, who joined the European private equity firm in 2018 to spearhead its expansion into North America, where he now co-leads its team of 12 investment professionals.
For Clearlake, add-on acquisitions to existing portfolio companies have complemented operational improvements. Eghbali said the firm has completed 35 add-on acquisitions each year in the past three years with an eye towards creating value through more efficient operations.
“Valuations are up and we’ve got to be that much better, that much smarter, that much more impactful on the operations of the business,” Eghbali said.