What Software Private Equity Investors Look for in 2026: Growth, Retention, and AI Defensibility
Private equity remains one of the most active buyer groups for software companies, and appetite for high-quality assets is very much intact. What has changed is the depth and rigor of the diligence that sits between a founder and a successful outcome. Across our conversations with sponsors, the message is consistent: investors are willing to pay, but they need to be more convinced than ever before they do. For founders considering a sale or recapitalization, understanding how investors are underwriting deals today is the first step in preparing a business to command a premium.
The Quantitative Foundation
Before any discussion of strategy or product, sponsors screen on a familiar set of metrics. These have not changed much over the years, but the tolerance for weakness in any one of them has narrowed considerably.
Growth. Revenue growth remains the starting point. Investors want to see recurring revenue growth that is organic and repeatable, ideally driven by a healthy mix of new customer acquisition and expansion within the existing base. They will study how growth has trended over several years and whether recent performance reflects durable demand or a one-time tailwind.
Retention. Retention is often where valuation is won or lost. Gross revenue retention shows how sticky the product is, while net revenue retention shows whether customers are increasing their spend over time. Strong retention signals that the product is embedded in customer operations, which reduces risk in the sponsor's growth plan and supports the use of leverage. Weak or declining retention raises questions that are difficult to answer late in a process.
Concentration. Sponsors look carefully at customer concentration, as well as concentration by channel, vertical, or geography. A business where a small number of accounts drive a large share of revenue carries more risk, and investors will either discount for that risk or structure the deal around it. Founders who can show a diversified customer base, or a clear path toward one, remove a common point of friction.
Profitability. Sponsors now expect to see a sensible balance of growth and profitability rather than one at the expense of the other. Frameworks like the Rule of 40 remain a useful shorthand, but investors increasingly focus on the quality of margins: gross margin structure, the efficiency of sales and marketing spend, and how much operating leverage exists as the business scales. A company that grows efficiently is far easier to underwrite than one that relies on heavy spending to sustain its trajectory.
The Qualitative Lens: AI Defensibility
Strong metrics get a company into the conversation. Increasingly, the qualitative assessment determines whether a sponsor moves forward with conviction. The most significant shift we have observed is the level of scrutiny around artificial intelligence, and specifically whether AI poses a threat to a target's long-term competitive position.
Investors are asking pointed questions. Could a new entrant use AI to replicate the core product at a fraction of the cost? Could customers build a comparable tool internally? Does the pricing model hold up if AI reduces the number of users a customer needs? These questions have become a standard part of investment committee discussions, and sellers should be ready to address them directly.
Several traits help a business answer them well:
Proprietary data. Companies that hold unique datasets, particularly data accumulated through years of customer usage, have an advantage that new entrants cannot easily copy. That data can also become the foundation for the company's own AI capabilities.
Deep workflow integration. Software that acts as a system of record, or is tightly connected to a customer's other systems, is difficult to replace. High switching costs remain one of the strongest defenses available.
Vertical and regulatory expertise. Products built for specific industries, especially regulated ones, embed domain knowledge, compliance requirements, and integrations that general-purpose AI tools struggle to match.
A credible AI roadmap. Sponsors want to see that management treats AI as an opportunity, with a practical plan to use it to improve the product, support pricing, or expand margins. A thoughtful strategy carries far more weight than a single feature release.
Resilient pricing. Models tied to value delivered, transactions, or usage are generally viewed as more durable than those exposed to a reduction in user counts.
Same Valuations, Higher Bar
Despite the added scrutiny, the headline for founders is encouraging. Most private equity investors are still prepared to bid within the same valuation ranges they have historically targeted for high-quality software businesses. Capital remains available, and demand for strong assets has not faded.
What has changed is the threshold required to earn those valuations. A company that might once have drawn competitive interest largely on the strength of its growth now needs to perform well across the full set of metrics and present a convincing case on AI defensibility. Businesses that fall short in one area will often still find interested buyers, but typically at a lower valuation, with more structure in the deal terms, or with fewer bidders at the table.
What This Means for Founders
Preparation has never mattered more. Founders thinking about a transaction should start by building a clean, well-supported view of their core metrics, understanding the story behind their retention and concentration figures, and being able to explain any anomalies clearly. Just as important, they should articulate their defensibility early rather than waiting for buyers to raise the question. How a company frames its position relative to AI can shape a buyer's perception from the very first meeting.
At Sampford Advisors, we work closely with software founders to prepare for this level of scrutiny, positioning each business to meet the higher bar and to compete for the strongest possible outcome. In a market where investors remain eager but selective, that preparation is often what separates a good result from a great one.