Private equity firms are increasingly becoming backers of venture capital-backed companies in Europe with more companies at the growth stage leading to more opportunities for roll-ups, according to investment firm Atomico.
Start-ups in the region historically have been sold to trade buyers or raised capital via initial public offerings.
Four out of seven private equity transactions at more than $1 billion in enterprise value in 2020 involved VC-backed companies. That compares with just one in 10 transactions the prior year. Deals this year include EQT’s investment in Spanish real estate online platform Idealista and Vista Equity Partners’ acquisition of sales software company Pipedrive.
“This represents a healthy potential driver of liquidity in European capital markets, opening up new exit routes for founders and their investors,” Atomico noted in its State of European Tech report.
Several factors are behind Europe tech’s rise, which had not been the case previously, according to Cambridge Associates’ head of EMEA private equity Peter Maher. This included earlier venture capital funds generating solid exits and returning capital to LPs, as well as GPs backing repeat entrepreneurs.
“The risk tolerance of founders has increased and there is more acceptance of taking on venture and growth equity capital,” Maher told affiliate publication Private Equity International. “There’s also more of a tolerance for failure, which is what you need for creative disruption that will eventually lead to higher returns.”
“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,” Hg’s head of tech research David Toms wrote in the report. “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.”
The worlds of PE and VC are “inching closer together” across PE-led buyouts, majority ownership and late-stage growth rounds, the report noted. Silver Lake and BlackRock participated in the $650 million round of Swedish payments company Klarna in October, while Permira led the funding rounds of travel company Flixbus ($561 million, series F) and software platform Mirakl ($300 million, series D).
Total investment into European tech is on track to exceed a record $41 billion in 2020, slightly higher than the $40.6 billion last year, and up 52 percent from 2018.
Activity has recovered after a slowdown in investment activity in the second quarter of the year and through the summer as coronavirus lockdowns started to take hold, with a record $5 billion invested in September alone – the highest ever month on record – Atomico noted.