New buyers boost European tech M&A

Octavius Mihaies, Managing Partner at Clearwater International, talks to Kezia Joseph, Editor, Tech Finance about the ever-changing landscape of European tech M&A, the influx of foreign buyers and increasing valuation multiples.

With regards to the technology sector, how are you seeing M&A across Europe and which markets are seeing most activity?

The UK is currently the major tech market in Europe, followed by the Nordics, so there is a pretty strong mid-market environment here in the UK. Everyone has a different definition of what mid-market is, however our sweet spot spans from E50m up to E250m, in terms of EV.

What is interesting in continental Europe, is that the market is just starting to mature for so many reasons. Firstly there is an increasing share of repeat entrepreneurs who typically have sold their previous companies at an earlier stage and now have the ambition to build larger mid-size companies, to expand growth and to do acquisitions, which previously has not been a main driver with regard to tech M&A, except for the large transactions.

Secondly generalist private equity funds are looking at tech assets and there will be more and more transactions completed by these funds, which are especially keen on the SaaS model, which is pretty well suited for leverage buyouts. Finally, there is also a more active reservoir of potential buyers from Europe, US and increasingly Asia. For example, if you look at the top 10 tech transactions in France last year, more than two-thirds were completed by foreign buyers.

What is driving these trends and what types of buyers are emerging?

Buyers consist of both strategic and private equity firms and driving this is a very good of reservoir of knowledge and know-how in sectors like software and fintech. For instance, you  have large players in the banking and insurance industry and the same in the mobility segments where you have strong car makers in France, Germany and Italy, so there are also very strong underlying foundations in certain industries across Europe.

Valuations are also lower in Europe than in the US for instance, which is down to the maturity gap, so there is still less competition, for instance, within the PE space than in the US, though we are seeing an increase in prices of tech assets.

Another factor is the scarcity of assets, the market is not yet fully mature so you have significantly less mid-size targets in continental Europe than in the UK, for instance, and also there is increasing competition with generalist funds entering the markets and US funds being increasingly aggressive, the likes of KKR, Carlyle, General Atlantic, for example.

So, it starts at the growth equity stage. This is particularly noticeable in software and fintech but also with a few internet transactions, typically the successful IPOs of companies such as Farfetch and Adyen create a precedent, in terms of potential interest, for internet companies.

This is driving up valuation multiples, particularly in software, where it’s not surprising to see deals between 12- and 14-times EBITDA. There is also increasing leverage available for software companies, so it still takes lenders education, but buyers are discovering the beauty of the SaaS model, so more leverage is also driving up prices.

What are the hottest subsectors in European tech and where are you seeing the most investment appetite?

Enterprise software is attracting a lot of investment, particularly in SaaS where there is an increasing number of SaaS investors considering companies which are completing the shift from on-premise or a licencing model to SaaS mode. It is by far our largest market.

Indeed, if you look at SaaS models, you have strong visibility on revenues, pretty good margins and another reason is the increasing activity from non-banking players as lenders. It’s far from being the same situation as in the US but private debt funds are being increasingly active and interested in tech companies which can provide visibility on earnings and cash flows and this is driving up leverage across the board.

IT consulting companies have also been attractive for PE players and you could see valuation multiples push above 8 times EBITDA for these firms, which is quite a lot for pure services companies. Recently we have had leverage between 3- and 5-times EBITDA, which is pretty unprecedented with respects to these companies.

Fintech as well is seeing a lot of traction and mobility will be increasingly hot moving forward as digitalisation is still low in the industry. Also, there are internet platform companies, as illustrated in France by large fundraising rounds like Meero and Doctolib, which will see continuous increase in M&A and PE activity going forward..

Another segment which is already hot but will become more so, is everything related to cloud and managed services. There are currently buy and build strategies which are being carried out by PE funds and these are increasingly cross-border. We have made several transactions and have several on-going processes in that space.

 

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