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The State of European Tech 2021 is now live.Read it here
Private Equity and European Tech
Private equity buyout firms ('PE') are playing a growing role in the broader European tech ecosystem, but their presence and activities are not yet that well understood within the mainstream tech narrative.
To that end, we have partnered with Hg, Europe's leading software investor to explore the state of European tech through the lens of private equity.
A positive development for European tech is the emergence of an increasingly active exit route to private equity buyers. The strength of the European tech investment opportunity set has attracted an increasingly deep and sophisticated base of investors with large funds available to deploy in the region. Hg is Europe's only large-scale, pureplay homegrown tech buyout firm, though the investor base active in European tech spans local, generalist funds from inside and outside Europe with a tech focus. Leading US pureplay tech buyout firms, such as Vista Equity and Thomas Bravo, are also sometimes active in Europe.
Selection of the leading European-based and European-focused tech PE firms
The past two years have seen an unprecedented level of large-scale buyouts of European tech companies. Since 1 January 2019, there have been 17 acquisitions of European tech companies at an enterprise value in excess of $1B. The list of companies is dominated by enterprise software companies, but also includes a number of significant consumer transactions, such as Badoo, AutoScout24 and Idealista. Horizontal enterprise software is well represented, but the companies span multiple verticals, including fintech and healthtech. Though sponsor-to-sponsor transactions are the most common, there is also a mix of types of transactions, including public-to-private and corporate divestitures. The geographic diversity of European tech is strongly evident in this analysis, as most of these companies have been built in towns and cities not typically associated with Europe's most active tech hubs.
It is fascinating that, despite the huge scale of the PE-target companies, most of them are likely to be unknown to the European tech ecosystem which has been traditionally built around VC-backed startups and scaleups. The fact is that Europe is home to a large number of 'hidden giants' that have remained 'off-the-radar' by building outside of the more mainstream VC ecosystem. These are huge companies that have thousands of employees or hundreds of millions of dollars of revenue. Yet, by building off the venture fundraising path, many of them have scaled without ever taking any external equity funding, i.e. by having bootstrapped growth. JetBrains is a great example of a huge business that has been built with zero funding. JetBrains is based in Prague in the Czech Republic. This may be considered an unlikely home for a European tech giant but, as the list shows, this should not be considered the case. In fact, another Prague-based company, Avast, went public in 2018 and is now valued at $6.3B. A common theme that runs through several of these companies is that many are tackling markets that initially seem too small to be of interest to global players, but by the time they figure out they are interesting, a local player has "won" already. Prominent examples include Allegro versus Amazon / eBay in Poland.
It is a positive, therefore, that there are now growing signs that these two worlds are inching closer together. Coming back to the 17 $1B+ acquisitions of European tech companies by private equity buyers reveals an interesting trend. While just one of the ten transactions (10%) in 2019 involved a company that previously raised funding from VCs, the numbers for 2020 show that PE buyers appear to be setting their sights on venture-backed assets with growing regularity. The seven transactions at >$1B EV in 2020 involved four European tech companies that were previously venture-backed, including Pipedrive, Idealista and AutoScout24. This represents a healthy potential driver of liquidity in European capital markets, opening up new exit routes for founders and their investors.
A further reason to be positive about the growing presence of PE-backed European tech companies is the role that they can play in driving liquidity into capital markets through their M&A rollout strategies. The average PE-backed company executing a roll-up based growth plan makes two to three so-called bolt-on acquisitions of smaller companies per year over the lifecycle of its holding. Again, for a European market that generally underperforms in terms of driving exits, this should be welcomed and highlights the growing breadth, as well as depth, of European exits or capital-raising opportunities. Historically, the options might have been restricted to trade sale or IPO, but now there is scope for growth equity, private equity or rolling-up into a larger European entity. This helps drive more success, as well as providing further off-ramps for investors, employee shareholders, angel investors and operator talent to find their next paths within the ecosystem.
Selection of acquisition of European VC-backed tech companies
The emergence of PE-led buyouts or majority ownership transactions as a viable path for VC-backed companies is exemplified by recent transactions in the past two years. This is a trend that has long since been established in the US, but has been underdeveloped in Europe until recently.
auto24
Munich, Germany
Idealista
Madrid, Spain
Pipedrive
Tallinn, Estonia
Veeam
Baar, Switzerland
Selection of late-stage growth rounds led by PE investors in 2020
The coming together of VC and PE investors in European tech is also evident in late-stage investment trends. A growing number of large growth rounds of $100M+ now involve the minority participation of investors more traditionally associated with majority investments.
Stockholm, Sweden
$650M, Growth Equity, Sept 2020 / Silver Lake and BlackRock
Munich, Germany
$561M, Series F, Jul 2020 / Permira
Paris, France
$300M, Series D, Sept 2020 / Permira
Paris, France
$200M, Growth Equity, Jan 2020 / CVC
Paris, France
$190M, Series D, May 2020 / BlackRock
Paris, France
$160M, Series B, Oct 2020 / BlackRock and Bridgepoint
Since 1 January 2019, there have been at least thirteen exits of of PE-backed European tech companies at greater than $1B enterprise value, totalling an aggregate value of almost $60B. As Visma's partial exit at a value of $12.2B clearly demonstrates, the magnitude of outcomes is becoming even larger. The scale of these outcomes is driving confidence in the upside potential, even when the entry EV is in the billions - a fact that will drive further sponsor-to-sponsor large cap activity. PE-backed European tech companies are an important contributor to IPO market activity, as exemplified by the IPOs of companies such as Allegro, Nexi and TeamViewer in recent years.
Our success is a result of a commitment to innovation, our customers, our people, and an engaged and diverse corporate culture. For almost 15 years now, Visma has benefited from a supportive and highly knowledgeable private equity investor base which has enabled us to consistently expand our product offering and geographic footprint.
As Europe's most valuable PE-backed software company, Visma represents an interesting case study. Visma first took on private funding from Hg in 2006, moving away from the constraints of a public listing in order to drive longer-term investment in the company’s strategy. The CEO at the time, Øystein Moan (now Chair), had joined Visma in 1997 when it was a $25M revenue Norwegian software business. Alongside Hg, Moan has taken it to $2B of annual revenue and a $12B+ EV. Visma coupled an early focus on SaaS (before many other providers even considered this delivery model) with an M&A strategy targeting innovative businesses in new geographies and product areas, allowing it to increase its own pace of innovation even as the business scaled. Visma has scaled to more than 1M SMB customers, served almost entirely through SaaS platforms, making it Europe's largest "local" SaaS software provider by revenue. The case study also highlights how it is possible to grow to a large size by combining a number of small, local markets under a single cohesive strategy, alongside long-term investment and a team of experienced operators.
I’d known Øystein Moan and Visma for many years, so when he called in 2006 and asked me if we wanted to invest, I could see this was a special opportunity. Even so, our expectations have been blown away by the scale and duration of Visma’s success. 14 years into our investment (and with many more ahead), it is growing faster than ever, and it’s been a privilege to have been so involved with the company’s journey from $500M to $12B, with so much left to come.
An interesting aspect of Visma's journey is that it has successfully navigated the transition to the cloud where many others have struggled. Visma has scaled its SaaS revenues from 29% of total software revenue in 2015 to 71% in 2019. Most impressively, it has added SaaS revenue as pure growth on top of its existing on premise revenue base. Today, Visma has more than $1B in SaaS revenue, making it easily one of the largest SaaS companies to have scaled from Europe. This is a remarkable achievement in and of itself, but to have done so in a core market footprint of nine small European countries, of which the largest has a population of just 17M, makes it all the more impressive as a case study into Europe's hidden tech giants.
As far as European tech is concerned, the worlds of VC and PE have historically not overlapped a huge amount. In fact, they have mostly existed as separate islands altogether - to the detriment of the tech ecosystem as a whole. The fact that these circles of capital and talent only overlap at the margins misses out on the potential for increased scale and liquidity. Europe's flywheel is dependent on building a talent and capital marketplace that is liquid and systematically recycles at scale.
The European Flywheel
Why wouldn't the European early-stage ecosystem want to be closer to such a talent pool?
All in all, and to coin a very European term, this "ever closer union" represents a healthy development for the liquidity of European capital and talent markets. The convergence of VC and PE in tech has the potential to create greater optionality in terms of potential paths to liquidity. There is a talent upside too if these worlds come together. A hallmark of PE investors is their network of experienced, tier one executive talent - people that run organisations of thousands of employees, P&Ls of $100s of millions, and products sold into thousands of companies.