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Private Equity Exits in Climate Tech and Critical Infrastructure Software

Private Equity Exits in Climate Tech and Critical Infrastructure Software

Since 2018, 244 software companies focused on sustainability tech or the digitization of critical infrastructure have been acquired.

This includes companies in climate tech, drones, robotics, supply chain tech, cybersecurity, and sustainability.

One large shift within the exit landscape has been the increased activity of private equity firms.

Source: Pitchbook

In 2018 and 2019, PE buyouts comprised ~45% of all acquisitions. Between 2020-2022, that number has jumped to near 60%.

This increased interest in software companies creates a reliable exit avenue for venture-backed companies, an assertion that is especially true at the intersection of software, sustainability, and critical infrastructure.

Private equity firms typically target SaaS companies at $20M in ARR or more with good unit economics and growth in the 20-35% per year range.

As the number of software companies focused on sustainability and digitization of infrastructure matures, the number of potential PE targets meeting these criteria increases.

When companies achieve these benchmarks, PE firms also tend to pay more both in terms of whole dollar amounts and revenue multiples.

Since 2018, the average EV/revenue multiple of strategic M&A has been 4.5x, with Buyouts (PE) averaging 13.1x over that same timeframe.

This makes intuitive sense. Strategic acquirers within these sectors often have balance sheets and public multiples that prevent them from overpaying for assets. I've talked about that at length here.

Meanwhile, private equity firms are more focused on their cost of capital and target IRRs within a singular investment, which changes the overall calculus. They'll "overpay" if they believe they can hit their return metrics in the appropriate time horizon.

Just like VC, record amounts of PE have been raised and sitting as dry powder ready to be invested.

Market multiples have compressed by 50-70%, creating a harvest season for private equity investors. The combination means we’ve entered a market ripe for the picking but should be beneficial for the ecosystem as a whole.