PE investment shift boosts Euro TMT

Competition for European technology firms is as fierce as ever, driven by increasing multiples and a greater demand for premium assets. Private equity firms are increasingly cashing in (and out) on this market trend and breaking away from the typical holding period of five years on portfolio companies, marking a shift away from the previous long-term investment horizon that was typically held by these financial sponsors.

'Three to five years is the standard horizon now rather than five to seven', according to Jonathan Simnett, MD, Hampleton Partners. ‘This is because private equity firms are investing more in tech than ever before. These financial sponsors are getting much closer to strategic offers but are spending more money up front so need to realize investments quicker,' he said.

'There’s been a recent wave of sponsor-backed asset sales', one source added, ‘and this creates a gap between average assets and A+ assets and this is only going to increase. The top half of the year has seen a big clearing in private equity assets and financial sponsors just aren’t waiting five years anymore to sell their holdings in these companies.’

A prime example of this trend, sources added, was the takeover of Refinitiv by the London Stock Exchange to create a financial news and data platform to rival Bloomberg. The LSE acquired the business from Blackstone which invested in the company less than a year ago, acquiring a controlling stake in Refinitiv (previously named Financial & Risk) from Thomson Reuters Group in October 2018.

For Simnett, the shift in tech ownership cycles has seen private equity firms become much more creative with the way value is extracted from portfolio assets. 'Tech cycles are becoming much faster and shorter so private equity firms need to get in and out before the value of assets decline’, he said.

'Private equity firms are building roll-ups and rather than increasing value over an extended period they are putting together strategically important assets in a shorter time, at a greater value. These financial sponsors are now targeting a segment or are creating a category within tech by acquiring companies that don’t belong in other segments, which in turn multiplies the value of this new category.’

Software in particular seems to be a hot area, especially ERP or business software, with TMT Finance exclusively reporting on several companies which hit the market earlier than expected, with UK-based software firm Advanced being the most recent. Vista Equity Partners invested in the business in 2015 and earlier this week sold a 50% stake in the business to BC Partners in a £2bn deal. Vista chose to partially exit Advanced four years after its initial investment, with TMT Finance first reporting in October 2018 that a financial adviser had been enlisted to explore sale options.

Also announced this week was the acquisition of UK-based HR software firm FMP Global Holdings by IRIS Software Group from private equity owners Tenzing, which exited the asset after a three-year holding period for a 5.4-times return.

Earlier this year, TMT Finance also exclusively reported on the acquisition of Irish software firm Meritsoft by US IT services giant Cognizant, taking over from owners Synova Capital who held Meritsoft since 2015. In the fintech sector, French financial software firm eFront was sold by private equity owner Bridgepoint after first investing in the business in 2015. eFront was acquired by asset management firm BlackRock for US$1.5bn.

The sales of eFront, Meritsoft, Advanced and FMP Global all commanded around a 20-times EBITDA multiple and with cash-heavy strategic buyers in the market to buy, the timing is ripe for many private equity firms to take advantage of the investment appetite and cash in early. 'Private equity buyers now seem to have a more short-term investment horizon', one source added, 'and this increase in sponsor-based sales is a symptom of a very active market, there’s lots of money sloshing'.

Simnett concluded: 'The game has changed, and PE firms are taking a difference approach to building value over a shorter period of time. The rate of M&A is so high they can’t miss the boat to sell on and this shorter investment horizon is often associated with the most active areas of disruption and innovation.'

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