Germany resists pan-European tech buyout decline

The DACH region saw a decline in buyouts in the technology sector from 31 in 2017 to 24 in 2018. In the context of an overall increase in DACH in buyouts across all sectors – from 157 in 2017 to 162 in 2018 – and the continued appetite for technology buyouts among private equity firms, this is somewhat unexpected. Early-stage deals in the sector, including seed funding, also saw a decline, from 57 in 2017 to 40 in 2018.

The drop in tech buyouts follows a pan-European trend, as every region, except for southern Europe, saw a decline in the sector. This could be symptomatic of a saturated market, or investors may no longer want to pay for technology companies with increasing valuations. EBITDA multiples for technology companies in the DACH region are some of the highest in Europe; the average multiple for the TMT sector was 13.3x between Q3 of 2017 and Q2 of 2018, according to Unquote Data.

Despite these high multiples, Germany appeared comparatively resilient to a pan-European drop in tech buyouts in 2018. France, like Germany, saw 25 technology buyouts in 2017 and while there were 23 buyouts in Germany in 2018, there were only 19 in France. Goodwin partner Gregor Klenk, says of Germany: "I would not call this a trend. I would call it a dip."

Klenk is confident in the future of the sector: "The outlook is very positive, we are quite bullish. We have been extremely busy on the tech side. Lots of the deals were tech-related or businesses that were tech-enabled. There is so much liquidity in the market that needs to be applied and the interest of foreign investors in the German market is still there."

Kai Roolf, an investment director at mid-market buyout firm Afinum, is also confident in the future of the DACH technology sector: "In 2018, Afinum has seen large dealflow in tech-enabled deals. We are trying to further strengthen our position in that segment."

"There is so much liquidity in the market that needs to be applied and the interest of foreign investors in the German market is still there" – Gregor Klenk, Goodwin

Maturing market
Deal value grew dramatically in the sector from €2.2bn in 2017 to €5.5bn in 2018, an example of strength in the region. This jump is largely a result of two mega-deals: EQT's $2.5bn purchase of
open-source enterprise software provider Suse from Microfocus and General Atlantic's €1.8bn purchase of Nucom Group, which consisted of 10 companies owned by ProSiebenSat.1.

Such an increase in deal value could represent a maturing in the sector, especially as these deals are two of only six mega-deals in the DACH region. Klenk says: "We would view this as a sign of the market being more mature, investors becoming more sophisticated and a bit more focused on the later stage of the life cycle."

One explanation for the decline could be a blurring of the lines between technology and industrials, with the increase from 45 to 50 buyouts in industrials accounting for the drop in the technology sector. As Goodwin partner Lars Jessen says: "Certain areas of the construction industry are particularly vulnerable to disruption, with 3D printing as an example of the industry becoming more tech-focused and enabled."

Afinum's Roolf says: "The borderline between tech and non-tech is increasingly fuzzy. For instance, we looked at a business services company with almost 50 software developers on the payroll."

In 2018, mid-market buyout firm Finatem Beteiligungsgesellschaft bought Swiss industrials company Mungo Befestigungstechnik, a fastenings producer. Beyond the technology used in the manufacturing process and the fastenings themselves, it also offers design software. Such a company could fall into either sector.

This phenomenon may be exacerbated by firms looking for operational improvements through digitalisation. For example, Project A Ventures has a team of 100 professionals dedicated to digitalisation and tech-enablement that can be selected to participate in operations. The firm assists with UX, business intelligence, software engineering and CRM optimisation to ensure its portfolio companies have a digital and data-driven approach and structure.

There were six buyouts in the technology sector in January this year. This could account for the small number of buyouts last year. In any case, if buyout volume continues at this level, the dip in tech buyouts in the DACH region is likely to be short-lived.

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• Topics
• DACH
• Technology
• Investments
• Germany
• Afinum
• Goodwin