Investing in the Enterprise Software industry: Tailwinds and societal drivers

  • 23-04-2024
  • Whitepaper
In this whitepaper, we outline the tailwinds and value drivers that have consistently propelled the Enterprise Software industry's growth over decades. We underscore the industry's attractiveness, resilience, and ongoing relevance as an investment opportunity, both historically and in the future.

Investing in the Enterprise Software industry: Tailwinds and societal drivers

Main Capital Partners follows a pure play in buy-outs in the profitable Enterprise Software industry, distinguishing itself as a niche specialist among tech investors. Professor Oliver Gottschalg of HEC Paris (and founder of PERACS) credits this success to Main Capital’s strategic focus on specific types of business models, financial profiles of companies and geographies. This focus and a thoroughly developed approach for value creation makes Main Capital Partners one of the best performing private equity firms in its league.

The Software Spending Surge: Decades of Consistent Growth

The software industry, a testament to ingenuity and innovation, has undergone a significant evolution since its beginnings in the ‘60s. What started as a modest endeavor by system supplier pioneers like IBM to unbundle hardware and software components has accelerated into a thriving ecosystem of digital solutions(Haigh, 2002). Initially, (system) software was tightly integrated with mainframe hardware and had limited functionality compared to today’s expansive Enterprise Software landscape. However, a series of pivotal events and technological innovations propelled the industry forward: the advent of personal computers, the development of Internet and mobile technologies, and later, the emergence of cloud computing. These breakthroughs, serving as general-purpose technologies, facilitated the widespread integration of software into various business and societal processes. Fast forward to today, where the COVID-19 pandemic has acted as a catalyst, propelling software adoption to unprecedented heights. In the face of adversity, businesses worldwide turned to software to navigate the challenges of remote work, digital collaboration, and virtual engagement. According to the latest insights from Gartner (2024) annual global software spend surpassed the monumental milestone of 1 trillion dollars in 2024, meaning that this industry – since its inception in the ’60s when vendors like IBM started with packaged software – impressively realized a CAGR of ~12%. The growth rate of 12% is validated and triangulated by Forrester Research (2022) and internal market research done by Main Capital.

The consistent growth over decades shows the non-cyclical character of the software industry. But what sets the software industry apart isn’t just its staggering growth—it’s the unwavering resilience and adaptability. In times of economic uncertainty, software becomes the linchpin for organizations seeking to optimize efficiency, automate processes, replace costly labor-intensive operations and stay ahead of the curve. Conversely, during economic upswings, companies invest in software to innovate, accelerate growth and improve customer delivery processes. Moreover, certain software solutions, deeply embedded within core business processes, exhibit minimal susceptibility to economic fluctuations, resulting in low churn risk. Thus, the sustained 12% CAGR reflects the industry’s resilience and suggests continued growth in the foreseeable future.

Internal research executed by the Market Intelligence practice of Main Capital shows that the relative size of (listed) software companies to the overall global economy grew too in the last decades. We compared the sum of market capitalization of listed software companies with GDP and total market capitalization figures over a timeframe of more than 40 years. This analysis points out that in 1980 market capitalization of software companies was close to 0% of the global economy indicators. In 2010, when Internet, social media and mobile technology were already on the market, this percentage was about 1-2%. Since 2021 we are looking at significant figures, which are in excess of 5%.

So, bottom line: irrespective of broader economic trends, the value and influence of software technology have experienced a remarkable surge over the past decades. In the following section, we delve into the underlying mechanisms driving this transformative growth.

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Bram Kaashoek

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