Software deals are hot.

• Author: Marshall, Jeffrey
• Position: PRIVATE EQUITY - Mergers

The market for private equity firms buying technology firms is red-hot, and is expected to double this year from the $44 billion in deal value in 2006. And one of the hottest submarkets is purchases of software firms, many of them private.

Robert Smith, managing principal at Vista Equity Partners in San Francisco, reviewed a number of characteristics about the marketplace in a late April webcast sponsored by Softrax, a revenue recognition solutions provider. Smith, who helped found Vista in 2000, is a former M & A executive with Goldman, Sachs & Co.; the firm has $1 billion invested in the software space and recently closed a similar-sized fund to do more buyouts.

Smith enumerated some of things that make a software firm attractive to private equity: being in transaction- or information-intensive industries; having customers who understand the firm's value or rely on its automation capabilities; and the absence of irrational competitors that Smith says can "poison" the market.

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Moreover, he added, buyers want to see recurring revenues, the opportunity for value creation and the ability to track key market data or business information. Private equity, he argued, "can liberate the business from the hubris" of owners or...