Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

*********************

RollUpEurope is turning 3! As a throwback to our toddler years, we’re taking a short break from B2B services rollups to pay homage to the industry that birthed this newsletter: software.  

Homage… or a moment of silence? 

Across the board, share prices of listed SaaS companies are stuck in an AI-induced rout. Suddenly everyone’s paying attention to Stock-Based Compensation, or the fact that you don't need multiple note-taking apps to run a business. Private markets offer no respite, especially since some of the largest deals were struck at the height of the previous cycle, washed down with expensive private debt. Just last week, Thoma Bravo handed over the keys to Medallia, an Experience Management SaaS it had acquired in 2021. Up in smoke went $5B in equity! 

But look closer, and you notice two things. 

One, a majority of the blowups we’re seeing right now are only tangentially AI-related. As Jason Lemkin pointed out, leverage and not AI wiped out Medallia’s equity, after its “annual debt service had climbed to about $300M by early 2026, against roughly $200M in annual earnings”. This happens when your buy-in price is 10.8x forward revenue (source). 

Two, the truth is, no-one really knows how this is going to end. Not PE. Not Private Credit. And certainly not the people pumping the AI hysteria in the hope of selling more tokens. 

Faced with this uncertainty, we chose to listen to a bunch of smart folks, wrote down what they said, and added our interpretation. 

Specifically, last week we attended Private Equity Conversations - a Berlin-based powwow of tech-focused mid-market PE firms like FLEX Capital (Germany, the organiser) and Parker Gale (U.S., a guest of honour). The conference came hot on the heels of our fireside chat with Marc Maurer, the COO of Chapters Group, Europe’s most active acquirer of Vertical Market Software companies and the subject of our deep-dive: Chapters Group: how to build a billion-dollar search fund investor. 

Here’s what we learnt from these 2 sessions:

This edition’s sponsors are Reef Pass: THE serial acquisition investors. If you are seeking HoldCo or rollup funding in North America or Europe, you should talk to Reef Pass Investors. Interested? Apply directly on RPI’s website or simply hit reply with a description of your idea + pitch deck.

The PEC runs on Chatham House principles, meaning we are free to share everything that was discussed, but without attribution. 

An investment banker talked about the deepening gulf between public and private market valuations. His analysis showed that, year-to-date, share prices of horizontal software stocks are down by 50%. Vertical software is down 20%. Overall since 2024, trading multiples are down 30% on both EBITDA and revenue basis. Whereas M&A markets have not experienced the same magnitude of adjustment, at least not in Europe. 

At least in public, direct lenders exhibited nonchalance bordering on defiance. “Standard” buyouts get done at 525-550 vs. 625bps for special situations. Huge variance depending on sponsor/lender relationships. Not so fast, chimed in a US delegate:

“The market for $100M+ syndicated debt is completely shut… 7 out of 10 lenders will not touch software with a barge pole. Some lenders now cap leverage at 3.5x, 4x EBITDA vs. 5x previously”.  

In this era of uncertainty, what counts as quality and resilience? According to another GP: 

“Take two SaaS companies. Company A has high recurring revenues, short implementation cycles and strong pricing power. Whereas Company B’s revenues are a mix of consulting, implementation, and seat-based pricing. Company B’s clients face long implementation cycles. 2 years ago, Company A would've been the superior pick, selling for 2x the multiple of Company B. But today? There’s an argument for saying that B is the superior business. Years of onboarding create high switching costs. Their pricing model is more adaptable vs. more rigid recurring revenue models”. 

Our thoughts: you can't turn back the clock… but in parts of Europe you don't have to. Whereas c.90% of German corporations use cloud infrastructure, the corresponding figure for SMBs is only 50%+ (source). Perhaps you don't have to strongarm those SMBs into recurring revenue contracts after all. Or maybe you don't need to sell them software but services? Which tells me that in parts of Europe, the MSP rollup mania has a long way to go. 

Further reading: MSP M&A WDYT? 7 lessons from Evergreen on scaling from 0 -> $1.5B revenue & $250M EBITDA

According to an LP with a long history of allocating to tech-focused PE funds: “There’s a flight to quality favouring established players with deep resources. Larger managers with specialised teams are capturing market share, whereas new managers are facing increased LP scrutiny during stress periods”. 

A lender I spoke to 1-on-1 expects the GP population to shrink considerably as software generalists get flushed out. At the same time, a straw poll revealed that most LPs have increased their allocation to low mid-market vs. 18 months ago due to the fact that “it’s almost impossible to keep up 14-15% returns with large deals due to financing costs, no multiple expansion by default”. 

Meanwhile, the lucky GPs that have already raised are struggling to deploy capital. As RealDeals put it, “Processes are being put on hold as GPs grapple with new valuations and how to deliver a clear AI story before they look to sell”. 

Amidst this scarcity of deal supply, competition has increased. A GP who had just raised a $600M fund complained: “The software TAM has shrunk but the amount of AuM chasing it hasn't yet adjusted. There are fewer deals in the market, and they’re very high quality. The competition has increased”. 

A GP representing the growth investing arm of a prominent buyout shop, duly offered a three-pronged investment strategy for surviving SaaSpocalypse:

One, invest in AI-native companies: “Nobody buys pre-2022 call center software”. 

Two, invest in AI Services roll-ups. Is anyone surprised PE is all over these? “We focus on labour displacement opportunities in service industries”. 

Further reading: 

“AI-enabled rollups” are booming. How to pick the winners?

Missed out on crypto, tempted by AI rollups? 2 leading VCs explain the latest craze - and why it’s here to stay

Three, invest in “legacy transformers”. Acquire incumbents in regulated industries and drive AI adoption. For example, “clinical trials software where regulatory moats provide transformation time”. Hang on, isn't that the old stomping ground of VMS HoldCos like Constellation and Chapters Group? And anyway, what is their plan?

Marc Maurer, the COO of Chapters Group, is a software industry veteran. He’s worked for Constellation Software. He’s worked for a PE owned software Buy & Build. 18 months ago, Chapters chose to divest almost all non-software businesses. In hindsight, was that a good idea?  

Alex: Marc, when it comes to acquiring public sector VMS in Europe, and in Germany especially, there are 2 contrasting visions. The positive vision: AI disruption will be minimal because the German state is still rather analogue. As a vendor, you grow with the client, your market share is protected, especially now, when everyone suddenly wants to buy European. The negative vision: these digital laggards can leapfrog to the latest, AI-native products. Which vision do you subscribe to, and why? 

Marc: I’m leaning towards the first interpretation, but with an important disclaimer. Many of our verticals serve public sector customers, who value stability and predictability. They don’t move fast. 

Due to these strong regulatory moats we could've taken the view that the AI panic is an overreaction and we’ll be fine… but we’ve adopted a different stance. We call it “Red Alert for Opportunity”. First, we want to become AI specialists in our niches. Second, we’re typically embedded in systems of record and customer transactions. There’s enormous value we can unlock by moving fast on AI, especially because we have trust and GDPR-compliant positioning that newer players don’t.

Alex: Let’s talk about the Manuscript Method, which is your baby. At a recent conference Jan-Hendrik Mohr, the CEO of Chapters, showed a chart which compared organic EBITDA growth pre & post Manuscript. 1% vs. 12%. Is that all just value-based pricing? How much of that growth is actually AI-linked?