Why would a private equity firm buy a company in a “risky” industry, such as software or biotech?

There’s a lot to unpack here. While most PE firms do want to buy stable, lower-risk businesses, that’s built on a core assumption. The core assumption is that the cash flows are stable, so they can predictably raise returns through stuff like cost-cutting and cost-optimization and maybe accelerate revenue growth a little bit.

There are other theses than just this. For example some PE firms use the thesis of:

Industry consolidation: The process of buying competitors within a similar market, combining them to increase efficiency, obtain economies of scale, win more customers and make the business more stable

Turnarounds: PE firms take struggling companies and push to make them function efficiently again.

Growth: Some PE firms look for high-growth, riskier companies because the payoffs can be a lot bigger. You can take a software company, make it maximally efficient, aggressively fuel growth and support new product development, and eventually take it public.

The long and short of it is there are a lot of ways to make money off businesses, not everything is cost-cutting and built on stability.