Private equity firms’ interest in technology assets is now a well-established trend. Deemed too esoteric by many only a few years ago, nowadays the tech sector is viewed as mainstream and sits at the heart of most firms’ strategic priorities. Even amid fierce competition, the prospect of delivering superior returns by backing a company positioned to benefit from, or even trigger and drive, an imminent technological paradigm shift is enticing. This article originally appeared in Real Deals.
Companies in sub-sectors such as software-as-a-service (SaaS) and cloud technology offer the added attraction of operating subscription-based business models. The recurring revenues these generate can service the higher levels of leverage frequently incurred by sponsor-backed companies and de-risk their financial profiles.
The association between private equity and technology has been historically less pronounced in the DACH region, comprising Germany, Austria and Switzerland. These countries have always been rich in mid-size, or ‘Mittelstand’, tech companies, but less fertile in terms of the more sizeable opportunities typically favoured by private equity. Consequently, its most prominent tech stories have focused primarily on earlier-stage investment activity. Examples include Berlin’s efforts to displace London as Europe’s principal fintech start-up hub, the plethora of well-funded software businesses in southern Germany and the billion-dollar-plus valuations secured by the region’s select few “unicorns”, such as HelloFresh and Delivery Hero, before the latter’s recent IPO.
Even amid fierce competition, the prospect of delivering superior returns by backing a company positioned to benefit from, or even trigger and drive, an imminent technological paradigm shift is enticing.
However, this fails to reflect the status of Germany and its southern neighbours as one of the world’s leading technology markets. The Mittelstand for which the German economy is renowned has matured and now includes a strong line-up of sizeable, market-leading technology companies.
Accordingly, the DACH region increasingly offers private equity firms the kind of mid-market transaction opportunities that are the industry’s bread and butter. PwC’s Private Equity Trend Report 2017 found that the proportion of buyouts within the DACH region accounted for by the TMT sector rose from 13 per cent in 2011-2014 to 18 per cent in 2015-16.
The association between private equity and technology has been historically less pronounced in the DACH region, comprising Germany, Austria and Switzerland.
A succession of high-profile deals in the last 12 months has exemplified what’s attracting private equity to the DACH technology market – beyond the broader impulse to hedge against post-referendum uncertainty in the UK by deploying capital amid the comparative political continuity of continental Europe, as demonstrated by last month’s federal elections in Germany.
Permira’s recent €835m secondary buyout of Personal & Informatik from HgCapital provides one such example. P&I’s investment into expanding its product portfolio epitomises the R&D-centric approach of many German tech companies. Its high share of recurring revenues marks it out as particularly suitable for private equity ownership. And its clientele of over 15,000 businesses and public-sector organisations, based principally in the DACH region but also ten other European countries, highlights the benefit of operating out of Europe’s largest economy and most active exporter.
In fact, a dominant position as a supplier to the lucrative Mittelstand market is a common characteristic of those DACH companies singled out for private equity investment. PlusServer, the leading provider of managed hosting and cloud infrastructure services to the German Mittelstand, was acquired from GoDaddy by BC Partners in a €397m buyout this summer. Headquartered in Cologne and formed through the merger of three businesses in 2015, the company is unique in having the scale to consolidate Germany’s fragmented managed hosting and cloud infrastructure markets. A private equity buy-and-build strategy offers a natural avenue for growing PlusServer’s client base of companies critically dependent on their IT systems’ performance.
This multitude of investment drivers is good news for vendors as well. Private equity firms approaching the end of their holding period in a DACH tech company are faced with an attractive exit market. Given the appeal to private equity, this of course includes secondary sales, as seen in HgCapital’s exit of P&I.
The DACH market offers clear proof that, in a time of heightened macroeconomic uncertainty, high-quality European tech assets can continue to command and justify premium valuations from private equity buyers.
Similarly, in August, ICG led the recapitalisation of Weilerbach-headquartered proALPHA Business Solutions – a Bregal Unternehmerkapital portfolio company and another leading Mittelstand supplier, as a provider of enterprise resource planning software to manufacturing and trading SMEs. With Bregal retaining a small minority shareholding, the deal highlights both the viability of exiting to another sponsor after a four- to five-year holding period, and existing investors’ desire to maximise their exposure to the growth potential of those leading DACH tech companies within their portfolios.
But secondary deals are far from the whole story. Trade buyers from North America and Asia are examining high-quality European technology assets and remain willing to pay mid- to high-teen Ebitda multiples for the right strategic target. EQT’s €600m sale of Austrian business automation provider Automic to US-listed CA Technologies in late 2016 represented one such example.
There’s a temptation to characterise the interest of US and Asian strategic players as an opportunistic response to short-term currency fluctuations, and the comparative weakness of the euro certainly does provide additional incentive. Moreover, in the wake of the Brexit vote, a continental European beachhead has rarely seemed more important.
More fundamentally, however, these tech giants are attracted to companies which, by virtue of the depth and loyalty of engineering talent in Europe (and the DACH region particularly), and with the support of European investors, have developed unique technical capabilities that can deliver significant synergies to the right trade buyer.
For example, during consecutive periods of private equity ownership, Vienna-headquartered Automic completed several add-on acquisitions, the largest being the purchase of French competitor ORSYP, and further developed its proprietary platform. Ultimately it was the opportunity to internationalise its operations and establish the leading global position in the fast-growing DevOps market that attracted CA Technologies and enabled a very high-multiple exit for EQT.
The DACH market offers clear proof that, in a time of heightened macroeconomic uncertainty, high-quality European tech assets can continue to command and justify premium valuations from private equity buyers.