Tech Investors Face New Reality as Easy Software Wins End

What's New

Bain & Company's Technology Report 2025 reveals that technology deals increased their share of all buyouts to 22% in the first half of 2025, up from 19% at year-end 2024, but the era of easy returns from simply riding software growth is ending. Private equity investors must fundamentally shift their value creation strategies as software market penetration flattens and traditional revenue sources lose steam.

Why It Matters

The software industry backlog of companies held longer than four years hasn't been this high since 2012, while $476 billion in dry powder sits in tech-focused funds globally. Future returns will increasingly depend on finding new revenue sources and expanding margins through operational excellence rather than the multiple expansion and market penetration that historically drove 96% of value creation.

Big Picture Drivers

• Market maturation: Software spending growth relative to GDP is slowing as penetration curves flatten in mature sectors like retail and manufacturing, where companies have deeply embedded solutions for nearly every workflow.

• Pressure mounting: Fund managers face growing recognition that raising the next fund will depend on freeing up capital sooner rather than later amid historically high portfolio company hold times.

• Traditional tactics failing: Like-for-like pricing increases are harder to sustain amid customer budget pressure and heavy competition, while traditional upsell and cross-sell motions lose effectiveness.

• Geopolitical headwinds: Tariff-related uncertainties and geopolitical tensions have slowed deal-making since April 2025, stretching out some deal processes.

• Multiple compression risk: The current interest rate environment makes the same level of multiple expansion that contributed 43% of historical value creation unlikely to continue.

By The Numbers

• 22% – Technology's share of all North American private equity deals as of July 2025

• 53% – Portion of total value creation since 2010 attributed to revenue growth in software PE deals

• 4% – Margin improvement's minimal contribution to value creation historically

• $476B – Dry powder sitting in tech-focused funds globally at end of 2024

• 43% – Historical value creation from multiple expansion alone

Key Trends to Watch

• Competitive displacement is becoming imperative as investors focus on taking share from weaker competitors in maturing markets rather than opening new white space.

• AI integration offers opportunities to transform legacy products and develop new use cases, with continued upsell and cross-sell increasingly dependent on AI-enabled innovation.

• Geographic expansion presents opportunities in regions where hot US sectors are slowing, requiring disciplined M&A capabilities and product localization strategies.

• Payments and data monetization are gaining traction in vertical software as customers demand integrated capabilities that capture valuable transaction data.

The Wrap

The opportunity in technology remains vibrant, but the path to capitalizing on it is evolving rapidly—what generated strong returns in the past won't deliver the same results going forward. Top-tier performers will be those who develop holistic margin improvement strategies, tightly define their most important customers, and treat R&D as a measurable function rather than a black box.