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

“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.”

Venture firms in the UK have seen a steady interest in portfolio companies since the onset of the market downturn last year, a London-based partner said. The difference now, they said, was that conversations with prospective buyers, advised against a year ago, are more encouraged.

This increased interest means private equity is set to play an enlarged role in Europe’s startup ecosystem. This comes despite a tricky market for many firms who have struggled to exit their positions so far this year.

Buyout funds on the hunt for acquisitions, later-stage growth funds looking at minority investments, and software rollups will all become more commonplace. This much has already been evidenced by the acquisition of VC-backed email security company Tessian by private equity-backed Proofpoint last month.

Amenable sellers and a pile of dry powder

Buyout funds, which buy controlling stakes in companies and make them more efficient, are sitting on $3.7 billion of dry powder, according to half-year data from Bain. In addition, they also hold around $2.8 billion in unexited assets.

Last month, London and Paris-based Keensight Capital raised $2.96 billion while PE giant KKR also raised its largest European fund to-date with an $8 billion raise that will see both funds target tech buyouts on the continent.

Alex Prokofjev, formerly CFO at software buyer and operator Threecolts and now head of RollUpEurope, said startups were 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,” he told 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.”

Valuations peaked in 2021 when venture capitalists poured record volumes of investment into European startups. Since then, investment has collapsed and founders, once driven almost exclusively by growth, have been told to focus on long-term sustainability. VCs pumped around 13.9 billion euros into European startups in the first nine months of the year, half of 2022’s total of 27.6 billion euros, according to PitchBook.

Roll up, roll up, startups for sale

That push towards profitability has made startups more attractive to buyout funds and rollups, according to Claire Trachet, founder of boutique advisory firm Trachet.

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

“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, where private equity firms buy up a bunch of small businesses in an industry and consolidate them into a larger company, are also on the acquisition hunt. Managers said they will predominantly look for so-called “sticky” startups in areas like software-as-a-service or cybersecurity that have built up an established customer base that are difficult to copy.

Crucially, private equity funds are unlikely to approach deals for companies that are not yet profitable, or unlikely to become so in the short term.

It’s not just private equity getting in on the software game either. Last month, Shop Circle, a London-based software business raised $120 million in debt and equity from VC investors as part of a strategy built around acquiring e-commerce and software brands, while the aforementioned Threecolts raised $90 million in March to do similar.

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