Software Index

State of the Market

This past month, we witnessed a decline in all major indexes. The Scalar Software Index NTM revenue multiple is down by 9.6%, and the NTM revenue multiple for the Top 10 Scalar Software Index companies has decreased by 15.5% to 13.3X. In July, the Consumer Price Index (CPI) increased by 0.2%, seasonally adjusted, and the CPI rose by 3.2% over the past twelve months, not seasonally adjusted. T-Bills continue to hover above 5.2%, and the consensus among economists is that the Federal Reserve will pause in raising the Federal Funds Rate during the September meeting but will retain the option to raise it by another 0.25% before year-end. Following ARM Ltd's IPO announcement, Instacart recently disclosed its plans to IPO this month. We anticipate this trend to persist over the coming months, with only a select few "best in class" technology companies pursuing an IPO.

We continue to observe an overhang of late-stage technology companies with liquidation preferences that exceed the company's current equity value. We anticipate more down rounds and recapitalizations with onerous terms, including participating preferred stock with multiple liquidation preferences or target multiple on invested capital (MOIC) returns for investors. For startups that aren't growing sufficiently to secure a new round of funding and can't reach breakeven, we are witnessing sale processes where the purchase consideration mainly consists of private company stock at inflated valuations set by the buyer, ultimately implying a much lower purchase price. The Scalar Software Index NTM multiple for low-growth companies stands at 3.7X revenue.

Notwithstanding the aforementioned, we are noticing an increase in conversations related to M&A and primary fundings among middle-market private equity firms. If a private company is profitable and experiencing growth, there are still numerous strategic options available to these management teams.