Europe’s software edge is hiding in plain sight

• European software demand is growing faster than the economy, with software the fastest-growing IT segment in 2024–25.

• Cloud migration still has a long runway in Europe — most enterprises haven’t moved half their workloads yet.

• Tight regulation is a feature, not a bug: firms fluent in EU rules and sovereignty demands can build durable moats.

What happened

On 20 June 2025, the FT argued that global investors underweight Europe are missing a strengthening investment case in regional software, citing faster software spend growth, a large base of scaled companies and supportive structural tailwinds.

Context & data

• Software outgrows the market: Gartner’s Europe outlook shows overall IT spend reaching $1.28tn in 2025 (+8.7% YoY), with software the fastest-growing line item (~11.4% in 2024; 13.2% in 2025). That’s well ahead of EU GDP.

• Cloud runway: McKinsey finds <1/3 of European enterprises have ≥50% of workloads in the cloud — i.e., the majority are still early in migration.

• Germany as a proxy: The ifo Institute reports 46.5% of German firms use cloud today and 11.1% plan to adopt — a tangible near-term catalyst for local SaaS/infra vendors.

• Capital is mobilising: Thoma Bravo closed a €1.8bn dedicated European fund to target regional software opportunities — signalling buyout appetite for mid-market deals.

My take

I buy the core of the thesis — but with nuance. The numbers suggest a sustained demand backdrop, and Europe’s cloud gap is real. That favours durable, product-led software with regulated-market exposure (R&C, health, public sector, CFO tools) where data residency, certifications (e.g., SecNumCloud, C5, ENS/EUCS) and local go-to-market matter. Vendors that internalised these constraints early can show cleaner unit economics (lower churn, higher NRR from compliance-driven upsell) and capital-efficient ARR growth.

From a PE lens, the opportunity is in scale-ups with line-of-sight to profitable growth and fragmented verticals where M&A can compound: buy the category expert with sticky workflow, tuck in adjacencies (analytics, integrations), and push pricing/packaging and partner channels as cloud adoption accelerates. Valuation dispersion versus US comps gives room for multiple expansion if growth/FCF durability is evidenced and governance is tightened. The fresh capital pools (e.g., Thoma Bravo Europe) should also create credible exit options — either sponsor-to-sponsor or strategic — as the bid for resilient software returns.

Risks & watch-list

• Regulatory burden drift: Compliance costs around AI/data/security can creep; winners turn this into a moat, laggards wear it as opex. Track certification roadmaps and audit cadence.

• Cloud timing risk: Elongated migrations or ROI disappointment can slow expansion ARR; watch payback, NRR by cohort, and cloud-native attach.

• Go-to-market efficiency: Heterogeneous procurement cycles and multi-country sales can inflate CAC; insist on 12–24 month payback and disciplined channel mix (direct vs. SI/CSP).

• Macro & exits: If rates or public multiples wobble, sponsor exit windows narrow. Keep an eye on large-cap buyers’ appetite and the health of the European IPO window.