
Quantifying PE's appetite for recurring revenue models

Sectors where recurring revenue models are predominant have been home to 22% of all European buyouts so far in 2021, against just 8% a decade ago, Unquote Data shows.
GPs across Europe have targeted businesses with recurring revenues for some years now. Many an investor has mentioned recurring revenues as a part of their investment theses, such as Cinven, when it acquired security alarm systems company Pronet Güvenlik in 2012; or Invision, with its acquisition of disinfectant maker Dr Deppe in 2017.
This focus has only intensified through the pandemic, as dealflow has shown clear signs of an increasing flight to quality – these businesses have attracted yet more attention, with processes growing ever more competitive and valuations rising.
While not a perfect proxy to track these types of businesses exclusively, the volume of investments in 10 sectors that typically enjoy recurring revenues – such as software, telecommunications and insurance brokers* – has grown as both a share of total investments and in absolute terms, Unquote Data shows: these investments made up 16% of all investments in Europe in 2010, and that figure rose to 38% in 2020.
Data surrounding buyouts alone illustrates the same trend. Buyouts in sectors where recurring revenue models are predominant made up 8% of European volume in 2010, with that figure rising to 18% in 2020. In 2021 to date, these sectors have been home to 22% of all European buyouts.
The aggregate value of these deals also illustrates a dramatic increase, from just 12% of all aggregate value in 2010, to 27% to date in 2021. This reflects not only an increase in deal volume, but also the higher valuations ascribed to these types of businesses – whether through the maturation of such assets throughout the past decade or higher entry multiples.
"High-growth software companies that have really soared in value are pulling up the overall average [entry multiple]," says Oliver Haarmann, a founding partner at Searchlight Capital Partners. "We are investing in recurring revenue businesses more in business services and communications, where we haven't seen such a dramatic increase as 8x, but we have seen an increase in valuations."
* Full list of sectors included in this analysis: alternative electricity, asset managers, fixed-line telecommunications, full-line insurance, insurance brokers, life insurance, mobile telecommunications, mortgage finance, reinsurance, software
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