- Insider interviewed Ali Osman, head of technology and software investments at Mubadala.
- He shared insights on AI and the future of software.
- The boom in generative AI has made ownership of quality data even more important, he said.
The past few years have been a gut-wrenching ride for many technology investors: Surging pandemic valuations, followed by a miserable plunge, and then an AI-powered revival.
Ali Osman, head of technology and software investments at Abu Dhabi’s giant Mubadala sovereign wealth fund, has invested steadily through it all and is not shying away from putting more money to work.
“What keeps me up at night? I sleep pretty well actually,” he said in a recent interview with Insider.
Mubadala has about $276 billion in assets under management, and Morocco-born Osman decides how some of that money is invested in technology companies. He and his team focus on business software and specialize in private equity, making direct buyout investments and indirect bets through major PE firms.
Osman works with many of the biggest and most successful PE firms in the tech space, including Thoma Bravo, TPG and Bain Capital. In late 2021, Mubadala teamed up with Vista Equity Partners to invest in SalesLoft in a $2.3 billion deal. A few months earlier, it was involved in a $6.4 billion deal with Thoma Bravo to buy Medallia.
Why software?
“As hot and over-covered as the software market may seem, there are more opportunities than the available capital and mindspace in the sector right now,” Osman said. “Our pipeline is quite extensive.”
The softer economic environment has put pressure on businesses to achieve better operating performance, so many companies are turning to software to become more efficient, he explained.
“Software allows you to do more at a lower cost and enables scale,” Osman added. “This is not about taking costs out. There’s a huge opportunity to use software to drive growth and leverage your IP and data to be more competitive.”
His team looks for businesses that offer “sticky” software that customers enjoy using and even rave about. Osman takes note of net promoter scores, an industry measure customer loyalty and satisfaction.
“When we use that lens, these businesses have been resilient despite challenging times and difficult decisions that some customers have had to make over what they need for their software stack,” he said.
AI uncertainty and data
The generative AI boom, and the rise of large language models, has introduced a major new variable to software investing. Some VCs see a possible long-term disruption to some software-as-a-service, or SaaS, businesses.
Osman said the emergence of this new technology has made data an even more important asset for software companies.
“When I think of AI, I think of data,” he said. “Let’s look at the high quality data in our businesses to create a competitive moat for these companies. An important response to AI uncertainty is to see whether we have agency over the depth, fidelity, and quality of our data.”
Investments must have a very clear “data moat” and the businesses must have ownership and agency over that data in a world where AI becomes more prevalent, Osman explained.
Mindspace and capital
PE firms that specialize in software have a well-designed investment playbook and the main bottleneck right now is the ability to repeat this successfully at scale, according to Osman.
“It’s the mindspace to create value and run these businesses in the most effective and efficient way possible and drive topline growth,” he said. “How do you do this 15 to 20 times in parallel? That’s hard. Even huge investors in this space can do a single-digit number of these things.”
The other bottleneck is capital, basically the cash available to invest in software businesses. While there are more opportunities, private-equity firms are generally less willing to take on risk and they have less equity to put to work in large buyout deals.
Some firms raised huge funds a few years ago and are out there trying to raise new ones now. Others are having challenges with portfolio company performance. Others may not have raised in recent years and are finding it more difficult to do so now.
“Every GP is dealing with their own reality right now,” Osman said, referring to the general partners that manage PE funds. “So large equity checks are hard to deploy.”
“There’s broadly less interest to do mega transactions versus a year or two ago,” he added. “The risk posture has changed.”
‘Not looking for exits’
Mubadala’s situation is different from many firms in private equity, according to Osman. His teams deployed about $5 billion in capital in the past few years. That means the portfolio businesses are still pretty early in their private journeys.
“We are focused on getting the cost structure right with these businesses and getting them to grow healthily over the next few years,” Osman said. “We are not looking for exits right now.”
His teams underwrite deals with five-to-seven-year time horizons to maintain financial discipline. However, Mubadala is not under the typical time pressures faced by PE funds.
“If we want to own a business for longer we are not in the situation of having to find liquidity,” Osman said.
Read the full article here