Structural resilience
Enterprise software companies provide essential tools and services to businesses, often serving as mission-critical components of their operations.
Revenues in the sub-sector are 'sticky'. Even during economic downturns or periods of high inflation, subscription-based, multi-year contracts and high switching costs contribute to stable and recurring revenues. They also reduce customer churn rates and make future cash flows more predictable. Together, these qualities are valued highly by investors, because they translate into lower-risk companies that perform robustly and can be resilient throughout the economic cycle.
Outlook and trends
Key innovations and trends support a favourable outlook for enterprise software:
Continued growth in cloud computing: cloud computing is a major driver of demand for enterprise software.
Increased investment in digital transformation: businesses are investing more in digital transformation initiatives in order to make them more efficient and competitive.
Human capital: enterprise software is disinflationary. Particularly at a time of low unemployment and high wage growth, cost-savings can be realised by automating processes.
Increased investment in cybersecurity and data protection: companies are placing greater emphasis on safeguarding sensitive information.
A shift to hybrid and remote work: this has created a new need for enterprise software solutions that can support distributed workforces.
Product evolution: regularly updating and improving enterprise software products not only helps retain existing clients but also attracts new ones.
Grand View Research expects the enterprise software market to grow at a compound annual growth rate (CAGR) of 11.9% from 2023 to 2028.1 This growth will be driven by demand for cloud-based enterprise software solutions, such as customer relationship management (CRM), enterprise resource planning (ERP), and human capital management (HCM) applications.
Investing in enterprise software
As the digital landscape continues to evolve, enterprise software companies are well-positioned to play an integral role in shaping the future of business operations and technology, ensuring their resilience and attractiveness in the world of investments.
Limited partners and private equity end investors looking to invest in the enterprise software sector should focus on funds that are managed by experienced investment teams with a strong track record of success in the sector.
These general partners should have a deep understanding of the enterprise software market and the trends that are driving growth, such as cloud computing, digital transformation, and hybrid and remote work. They should also have a clear investment strategy and a proven ability to identify and invest in high-quality companies.
Endnotes
1. Business Software And Services Market Worth $1,153.75 Billion By 2030 , Grand View Research, December 2022.
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