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The Pennsylvania State Employees’ Retirement System is considering a commitment to a European private equity fund focused on software and technology companies, as it looks to maintain exposure to the asset class and capture returns from the sector.
At a recent investment committee meeting, the pension fund recommended committing €100M to PSG Equity’s Europe III fund. The firm, now in its 12th year, operates a flagship team in Boston and a European platform headquartered in London.
The Europe strategy mirrors PSG’s established buy-and-build approach in the U.S., targeting emerging-growth software and technology companies. PennSERS has backed five of PSG’s flagship funds and two prior Europe vehicles over the past decade, said staff.
Europe’s technology ecosystem is expanding rapidly, with roughly $100B flowing into software opportunities across the investment cycle, said Dany Rammal, managing director and head of Europe at PSG, who also spoke during the meeting. The firm focuses on later-stage, bootstrapped companies that have achieved product-market fit. The market is growing at more than 30% annually and is narrowing the gap with the U.S., which remains more than three times larger.
A key driver is the continued migration to cloud computing. Less than 40% of European software is cloud-based, leaving significant room for adoption relative to North America, said Rammal. Artificial intelligence is accelerating that shift, lifting growth rates among cloud-native companies. The software sector has consistently outpaced economic growth by more than 700 basis points, with Europe showing even stronger relative gains due to its adoption runway.
Another tailwind is the growing preference among European companies for local vendors — a trend often described as digital sovereignty, he added.
“More than 70% of European businesses today prioritize data sovereignty, with data remaining in Europe, which is driving the selection of European vendors over North American competitors,” said Rammal. “This provides a substantial tailwind and a degree of defensiveness for the companies we invest in.”
The market remains highly fragmented, with more than 100 small- and mid-sized software companies across the region, creating opportunities for consolidation through buy-and-build strategies. PSG has executed that approach through several exits since launching its European platform in 2019.
PSG’s European fund series has delivered strong performance, with internal rates of return and distributed-to-paid-in capital ranking above the first quartile for their respective vintages, alongside below-median loss ratios, noted staff, pointing out the European fund series kept pace or beat the Russell 3000 index on a fund-by-fund and aggregate basis.
PSG founder and chief executive officer Mark Hastings said the firm focuses on lower-mid-market business-to-business software companies with established product-market fit, profitability, competitive advantages and strong management teams.
“We’re really in the business of creating those companies for that end-buyer universe,” he said. “We almost operate more like a software holding company.”
The firm employs roughly 45 professionals with functional expertise across software businesses, providing operational support to portfolio companies that often lack the resources to scale independently.
Rammal noted AI is becoming central to PSG’s strategy, both within its portfolio and its own operations. The firm has partnered with Mistral AI, a European large language model provider, to deploy AI solutions across its investments.
“AI is substantially expanding the universe of targets for us, both in terms of new investment opportunities and add-ons for our portfolio companies,” he said.
AI is expected to drive a sharp increase in software revenues, with projections pointing to a roughly fivefold rise over the next four to five years, he said. Advances in large language models have transformed how code is written, shifting from autocomplete-style tools to more autonomous systems in which developers direct multiple AI-driven coding agents through natural language.
The shift is reshaping the economics of software companies by easing historical constraints on engineering talent and enabling faster scaling. At the same time, Rammal pointed out new bottlenecks are emerging around computing power and energy, as rising demand strains infrastructure capacity.
For investors, the transition presents both opportunity and uncertainty as the pace of innovation continues to outstrip the market’s ability to fully price its impact, he said.
Rammal also highlighted its environmental, social and governance efforts, noting it is a signatory to the United Nations-supported Principles for Responsible Investment. The firm tracks portfolio emissions using industry benchmarks and emphasizes governance best practices across its investments.
He noted 49% of PSG’s workforce identifies as gender or ethnically diverse, including 39% women and 19% minorities.