A dramatic downturn in software company valuations, termed the 'SaaS-pocalypse' by industry insiders, is now threatening returns on private assets, according to a new report. The phenomenon, characterized by steep price declines in software-as-a-service (SaaS) stocks, is spilling over into private markets, where many funds hold significant stakes in unlisted tech firms.
Valuation Reset Hits Hard
The report from investment data firm PitchBook highlights that the median enterprise value-to-revenue multiple for publicly traded SaaS companies has fallen from over 10x in 2021 to roughly 5x in 2023. This compression is forcing private market investors to mark down their portfolios, potentially eroding returns for limited partners (LPs) in venture capital and growth equity funds.
“The correction in public SaaS valuations is directly impacting private company valuations, as investors apply lower multiples to similar businesses,” said a senior analyst at PitchBook. “This could lead to a wave of down rounds and impaired returns for funds that loaded up on tech during the boom.”
Impact on Private Equity and Venture Capital
Private equity firms and venture capital funds that invested heavily in SaaS companies at peak valuations are now facing the prospect of writing down assets. Many funds raised large sums in 2020-2021, deploying capital at high multiples. With the public market correction, these investments are under pressure.
- Down rounds: Startups that raised money at high valuations may struggle to raise new capital without accepting lower valuations, diluting existing shareholders.
- LP returns: Institutional investors, such as pension funds and endowments, could see lower distributions from their private market allocations.
- IPO drought: The weak public market for tech IPOs limits exit opportunities, forcing funds to hold assets longer.
Broader Market Implications
The SaaS-pocalypse is not limited to software; it reflects a broader reassessment of growth stocks in a higher interest rate environment. As central banks tighten monetary policy, investors are favoring profitable companies over those with high growth but no earnings.
“The era of free money is over,” noted a portfolio manager at a large asset manager. “Investors are now demanding a clear path to profitability, which many SaaS companies lack. This shift will have lasting consequences for private asset valuations.”
What Lies Ahead
The report suggests that the correction may not be over. If interest rates remain elevated, SaaS valuations could compress further. Private market funds with exposure to late-stage startups may be particularly vulnerable, as these companies often trade at multiples closer to public comps.
For LPs, the key takeaway is to scrutinize fund valuations and consider the potential for further markdowns. Some funds are already adjusting their portfolios by writing down assets or seeking secondary sales.
“The SaaS-pocalypse is a wake-up call for the private markets,” the PitchBook analyst concluded. “It underscores the importance of disciplined investing and the risks of chasing growth at any price.”
