Europe’s Public Markets Offer Happy Hunting Grounds For Private Tech Investors

The expansion of private markets – and the ready availability of capital to technology companies without having to list their shares publicly – has been a key development shaping the global digital economy over the past decade. The outbreak of Covid only served to further accelerate this trend. Earlier-stage technology companies were a major beneficiary, raising venture capital and growth equity funding in unprecedented volumes.

At the height of the pandemic, however, it was in fact in public markets where investors’ exuberance towards technology companies was greatest. The index tracking the share price performance of information technology companies in the S&P 500 rose by over 150% between March 2020 and December 2021. During this period, valuations were markedly higher for publicly traded companies than for many of their privately owned counterparts. These conditions engendered a powerful incentive for technology founders and entrepreneurs to take their companies public, one that had been conspicuously absent in the early days of the Covid pandemic.

That market environment feels quite some time ago now. Amidst rising interest rates, soaring inflation, Russia’s invasion of Ukraine and looming recession, the rout in equity markets has been most concentrated among some of the pandemic-era’s best-performers, those at the very forefront of the digital economy. Even allowing for a partial rally over the summer, the same S&P index is down over 21% year-to-date.

The rapid turnaround in the fortunes of publicly traded tech companies may prompt a feeling of buyer’s remorse among those companies and investors who respectively pursued and bought into an IPO near the top of the market. Any discernible valuation premium has evaporated. Public equity markets, intrinsically more volatile and prone to overreacting in both a bull and bear market, have now swung below private market benchmarks. Investors’ willingness to support public companies that were focused on boosting topline growth at the expense of profitability has largely subsided.

All those factors present an opportunity for private equity investors to go hunting for quality assets that have seen their share prices fall and to take them back into private ownership at an attractive price. The previously dominant mindset in public markets, of willingly sacrificing short-term profitability for long-term growth, has been shown to be dependent on a favorable macroeconomic environment. But private equity’s longer-term investment horizon means that private equity investors are highly suited to back those types of companies, which may remain top-quality businesses but are now being valued radically differently.

Vista Equity Partners’ recent announcement of an agreement to acquire the publicly traded tax automation software company Avalara exemplified this trend. At $8.4bn, or $93.50 per share, the purchase price represented a 27% premium to Avalara’s July 2022 share price – but less than half the September 2021 high of $191.67. Thoma Bravo has also been active in this space in 2022, acquiring the public companies SailPoint, AnaplanPLAN
and Ping Identity for c.$20bn combined.

These dynamics are even more applicable to Europe. The continent’s stock markets are populated by a higher proportion of ‘old economy’ companies than the more tech-heavy US markets – compounded by many of the largest European-headquartered growth companies choosing to list on the NYSE or Nasdaq. That means the shares of those digital-led businesses that are listed on Europe’s newer and more tech-centric exchanges trade in shallower, less liquid markets and attract less research coverage than more mature exchanges, offering fewer of the benefits of public ownership.

Moreover, they have suffered at least as great a drop in share price this year. The STOXX Europe 600 Technology Index has recorded a fall of over 28% to date in 2022. And, unlike the biggest US tech giants, many of these European public tech companies sit perfectly in the crosshairs of mid-market and large-cap private equity buyers, who target businesses either side of the $1bn valuation threshold.

Finally, Euronext, the pan-European stock market spanning seven countries, was a disproportionate beneficiary of technology companies’ fervor for going public and accessing cheaper capital during the pandemic. The low costs and short timeframes for listing on its junior exchanges prompted a flurry of IPOs involving companies that would likely otherwise not have considered public ownership. In the two years from April 2020, 329 companies listed on Euronext exchanges – a 250% increase from the preceding two-year period. Several of these will now be prime candidates for a ‘take-private’ buyout.

In Europe’s private markets, by contrast, we see transaction volumes and valuation levels holding comparatively stable, particularly for technology companies in resilient segments such as enterprise software and data. Private equity investors have significant capital reserves that they are committed to deploying, irrespective of the market environment. This helped fuel a 22.4% year-on-year uptick in the cumulative value of European take-private activity in H1 2022, with €17.5bn worth of deals closing, according to PitchBook.

Recent examples include Hg’s delisting of the UK compliance software provider Ideagen from the LSE’s Alternative Investment Market; Apax Partners’ pending $401m take-private of Norwegian environmental, health and safety software company EcoOnline; and the recent successful tender offer of a consortium led by Accel-KKR for Finnish financial software provider Basware.

But this trend still has significant further runway. It is often not possible for private equity to immediately seize upon this kind of market correction and snap up high-quality public companies. Typically, there is a lag between buyers identifying opportunities in oversold markets and vendors adjusting their price expectations. But we are now six months into this market correction, with further storm clouds gathering. More and more management teams and public shareholders will be realising that selling to private equity, even at a significant discount to a relatively recent share price high, represents a good deal for all involved.

We therefore expect this steady stream of private equity buyouts, returning European technology companies to private ownership, to continue. Without the quarterly scrutiny of financial performance that comes with being publicly traded, technology companies (and their private equity sponsors) can take necessary and even drastic measures to redress the financial profile of the business and chart a sustainable course between growth and profitability.

For European companies active in the digital economy, private markets never went away – but nor have they ever been as relevant as they are today.