#How Are Private Equity Firms Valuing Software Holdings?
Private equity firms have come under scrutiny for their valuations, particularly in the software sector. Recently, an executive from Apollo Global Management pointed out significant discrepancies in the way these firms are valuing their software assets. The concern lies in the fact that private valuations have not adjusted adequately in response to a declining public market.
The S&P North American Technology Software Index has seen a steep decline, dropping approximately 35% since its peak in September 2025. Despite this, private equity portfolios that contain software companies have been slow to reflect these market changes, raising questions about their valuation practices.
#What Has Apollo's Position Been Regarding Software?
This issue isn't new for Apollo Global Management. The firm has maintained a strategically cautious stance toward software investments for nearly 18 months, well before the recent selloff intensified. Their strategy is based on the assessment that the previous era of aggressive growth rates and exceptionally high retention figures in the software industry is no longer sustainable.
During a recent investor event, a provocative question was raised regarding the future of software investments, raising doubts about their viability in today's market.
#How Do Valuations Reflect Market Realities?
Historically, during the software boom, private equity firms have been paying high earnings multiples—often in the range of 15 to 20 times EBITDA—with substantial leverage. These valuations were justified by strong growth rates, often in excess of 30-40%, and impressive retention metrics. However, as growth slows and new competitive forces, particularly from AI, reshape the landscape, these valuations appear increasingly untenable.
The primary concern highlighted from Apollo’s perspective is the vulnerability of mid-tier and smaller software firms. These companies are especially at risk of being disrupted by AI technologies, and they frequently maintain valuations that have not been recalibrated to align with current realities. Many of these businesses rely on private credit financing, which becomes problematic as their revenues decline.
#What Are the Implications for Investors?
As valuations for public software firms have plummeted, private equity firms find themselves at a crossroads. They face the challenging choice of either lowering the valuations of their software holdings to align with public market trends, thus notifying their investors of diminished returns, or holding onto inflated marks in hopes of a market recovery.
Investors with exposure to private equity funds heavily invested in software during 2021 through early 2025 should consider these warnings seriously. When a leading firm like Apollo raises concerns regarding valuation practices within the industry, it sends a clear signal worth heeding.