Dealflow in the TMT sector has continued to heat up in the second half of 2020 amid a flight to quality and growing bullishness from PE sponsors, with high-teens multiples showing no signs of climbing back down.
The general uptick in European private equity activity from July onwards – as most countries emerged from lockdown and GPs started to pivot away from crisis mode and looked at deploying again – resulted in healthy dealflow boosts for stalwart sectors such as industrials and consumer goods & services.
PE-backed buyouts in the TMT sector jumped by 61% between Q2 and Q3 in volume terms
But one sector in particular continued to attract the lion’s share of interest: PE-backed buyouts in the TMT sector jumped by 61% between Q2 and Q3 in volume terms, while their aggregate value more than tripled thanks to the return of mega-deals, according to Unquote Data. The sector has been home to 27.4% of all buyouts across Europe since April this year, compared with just 19% if looking at the 2018-2019 period. In the UK, more specifically, this market share has now exceeded 31% since the outbreak of the coronavirus pandemic, making it the most active sector for PE buyouts.
Standout deals in the space in recent weeks have included EQT selling a minority stake in Sweden-based enterprise software provider IFS to US private equity firm TA Associates, in a deal valuing the company in excess of €3bn. EQT, on the buy-side this time, also acquired Spanish online property marketplace Idealista from Apax Partners for €1.3bn - around 26x its EBITDA of approximately €50m. Over in France, Silver Lake wholly acquired payroll and HR software business Silae in its first European acquisition of 2020, an all-equity deal reportedly valued at more than €500m.
“Right now, there is a better supply of quality assets when comparing with the end of 2019 and the first quarter of 2020,” says Carl Houghton, partner and head of the TMT team at Clearwater International. “A number of processes that stalled in the early stages of the first lockdown have come back to market too, with some still waiting to be finalised. But there is still a relative under-supply of assets compared with the amount of capital waiting to be deployed by PE.”
When there is a flight to quality, buyers will compete very hard, as is evident when looking at some recent processes where parties will move in to finalise a deal within a matter of days
This eagerness to deploy the vast amounts of dry powder amassed prior to the crisis, coupled with most mainstream GPs only focusing on the most resilient assets given the uncertain path to recovery, means that competition is fiercer than ever. “When there is a flight to quality, buyers will compete very hard, as is evident when looking at some recent processes where parties will move in to finalise a deal within a matter of days,” Houghton says. “Especially for tech assets – where a lot of that quality dealflow is sitting at the moment – PE players are clearly aiming to bid hard and be deliverable straight away, because they know everyone else (including PE-backed corporates on the hunt for acquisitions) will be aggressive too.”
Processes also tend to be more focused, Houghton adds, eschewing the traditional and time-consuming multi-round processes with extended vendor due diligence: “These top-shelf assets are packaged early on to be easily transacted so all the data is ready, and the list of potential suitors is kept short.”
Unsurprisingly, TMT therefore remained near the top of the average entry multiples table across Europe in Q3, as the attraction of resilience tends to outweigh potential qualms about future multiple arbitrage. Says Houghton: “The saying that “15x is the new 10x” is certainly still valid for good quality TMT assets, and I don’t think it’s unjustified either – although it’s not valid for every business out there. You can recover from having paid a couple of turns of EBITDA too many for the right asset. What you can’t recover from is the business just falling through the floor, and TMT has by and large been well insulated from that.”
Furthermore, and unlike what is seen in other sectors, the bifurcation within TMT assets in terms of quality is still fairly narrow, further fuelling healthy multiples across the board. While a small proportion of assets will have been hit hard by the wider shock, it remains a very small number overall. “You may see some specialist software suppliers serving the automotive industry, for example, implementing subscription holidays for their clients to cope – but again, it will be a small minority, and the effect will be temporary,” adds Houghton.
SaaS businesses in general have displayed great resilience based on their high level of recurring revenue
More importantly, and while assets in the consumer or industrial sectors remain at the mercy of further damaging lockdown as Europe grapples with a fierce second wave of the pandemic, the future looks much brighter for TMT as a whole. “SaaS businesses in general have displayed great resilience based on their high level of recurring revenue,” Houghton says. “The products deliver such high ROI for clients that there will be high net revenue retention in most cases, compensating for any decrease in new business.
“Even for project-driven business models, the growth in demand for digital transformation is off the scale. And sub-trends that were hot before are even hotter now, such as HR software focusing on wellbeing in the workplace. A lot of these trends were in play before COVID-19, but it has certainly accelerated the pace and played into the hands of these businesses.”