Roll up, roll up: Private equity funds target buyouts and consolidation at Europe’s cash-strapped tech startups

  • Private equity funds are targeting Europe’s startups as venture capital funding continues to slide.
  • VCs are fielding increased interest from funds exploring full buyouts and software rollups.
  • Funds are more bullish now and don’t want to miss out on the recovery, Target Global’s Pedro Barros said.

It wasn’t long ago that circling portfolio companies was considered an insult to venture capitalists.

However, the drop in startup funding, combined with a near-dormant IPO market, has made the idea much more appealing.

More importantly, buyers in the form of private equity firms are beginning to form a queue.

“Portfolio companies are definitely seeing more interest from private equity-backed businesses that wouldn’t have looked at them five years ago,” a fund manager in London told Insider.

“Growth is clearly harder so we’ll see a lot of M&A because PE funds are trying to grow their business and so are looking at early-stage tech businesses.”

Since the start of the market downturn last year, venture firms in the UK have seen a steady interest in portfolio companies, according to a London-based partner. The difference now, they said, is that conversations with prospective buyers, which were discouraged a year ago, are encouraged.

Because of this increased interest, private equity is expected to play a larger role in Europe’s startup ecosystem. This is despite the fact that many firms have struggled to exit their positions this year.

Buyout funds seeking acquisitions, later-stage growth funds seeking minority stakes, and software rollups will all become more common. This has already been demonstrated by Proofpoint’s acquisition of VC-backed email security company Tessian last month.

Amenable sellers and a pile of dry powder

According to Bain’s half-year data, buyout funds, which buy controlling stakes in companies and make them more efficient, have $3.7 billion in dry powder. They also have approximately $2.8 billion in unutilized assets.

Keensight Capital, based in London and Paris, raised $2.96 billion last month, while KKR raised $8 billion for its largest European fund to date, which will target tech buyouts on the continent.

According to Alex Prokofjev, former CFO of software buyer and operator Threecolts and now CEO of RollUpEurope, startups are a “very attractive part of the market.”

“Investors will become amenable to selling at a discount and the amount of capital coming into the space will cover for this,” said the insider.

“Typically, it’s hard to do acquisitions because of their inflated value but we will see companies crack and be sold for a nominal amount.”

When venture capitalists poured record amounts of money into European startups in 2021, valuations peaked. Since then, investment has plummeted, and founders, who were previously driven almost entirely by growth, have been advised to focus on long-term sustainability. According to PitchBook, VCs invested around 13.9 billion euros in European startups in the first nine months of the year, accounting for half of the total of 27.6 billion euros expected in 2022.

Roll up, roll up, for-sale startups

According to Claire Trachet, founder of boutique advisory firm Trachet, the push for profitability has made startups more appealing to buyout funds and rollups.

“I’m positive and excited by what PE can bring because they know how to support businesses,” she went on to say.

“Now, we’re asking founders to target profitability, not growth at all cost, but these companies are still growing enough, which is effectively what PE has always been looking for.”

Rollups, in which private equity firms buy a group of small businesses in an industry and combine them into a larger company, are also on the hunt. Managers stated that they will primarily look for “sticky” startups in areas such as software-as-a-service or cybersecurity that have built up an established customer base that is difficult to replicate.

Importantly, private equity funds are unlikely to pursue deals for companies that are not yet profitable or are unlikely to become profitable in the near future.

It’s not just private equity that’s getting into the software business. Shop Circle, a London-based software company, raised $120 million in debt and equity from VC investors last month as part of a strategy centered on acquiring e-commerce and software brands, while Threecolts raised $90 million in March to do the same.

“I think buyers are now a little bit more bullish, and my sense is that they are trying not to miss out on the beginning of the recovery,” said Pedro Barros, head of investor relations at VC fund Target Global.

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