Private Equity’s Comeback: Busy Second Half of 2024
Introduction
Many financial advisory firms are currently working overtime as numerous deals are being prepared in the Benelux IT market, which is experiencing an upswing.
The mild recovery that began to take shape in Q1 2024 is now firmly in place. With the first half of the year complete, Benelux IT M&A activity is tracking 5% to 10% ahead of 2023 in deal count. While corporate acquirers and strategic deals have experienced double-digit growth all year, PE-related deal flow had been struggling and holding back the recovery due to a greater sensitivity to high interest rates and anaemic exit activity. That changed in Q2 2024, and PE now appears to be joining in.
Reflecting that change, PE-backed and PE’s share of total M&A deal value rebounded to 79.3% in Q2 2024 from 70.2% in Q1, ending a nearly two-year skid at least for now. During the previous eight-year span, PE made steady inroads into the M&A market. However, PE is more reliant on debt to transact and, unsurprisingly, has lagged the upturn in dealmaking until this quarter.
“We expected 2024 to be a recovery year in M&A, given that it almost always rebounds from consecutive annual declines,” explains Randy de Visser, Vice President of the ICT team at CFI. “The prior two episodes of 2007-2008 and 2001-2002 registered total peak-to-trough declines of approximately 60% to 70%, whereas the present decline has measured 30.0% from H1 2022’s peak. This sets the stage for a milder recovery than what occurred in previous M&A cycles given that the downturn was not as severe, and that appears to be playing out.” The recent rebound has been fuelled by banks re-entering the market, lending to dealmakers again and competing with the nonbanks that moved in while they were absent. This has resulted in a stealthy rate cut of sorts, providing better liquidity for dealmakers even though most central banks have kept interest rates on hold, with the ECB being the notable exception as they finally cut rates in June. All-in borrowing rates have declined by as much as 100 basis points over the past year in the more speculative areas of leveraged finance due to a compression in spreads as more lenders compete.
“With other central banks likely to join the ECB in cutting base rates later this year, the M&A market can look forward to a second leg of reduced borrowing costs and interest expense on floating-rate loans. For the rate-sensitive PE buyer, this should reinforce the nascent recovery that has already begun. For the corporate buyer, they will likely see renewed competition for the assets they bid on. A rebound in the asset values of private companies—which have badly lagged the run-up of public companies and shares—would be the final ingredient of a more durable and robust M&A recovery. Furthermore, Dynamics between buyers and sellers are shifting once again, slowly tilting the environment back to a seller’s market,” explains De Visser
An indication of this positive trend is the growing number of exits among private equity firms. Main Capital Partners exemplifies this well: the Dutch investment company recently completed three major international exits, each valued at several hundred million euros. They sold Enovation to the French company Legrand, Optimizers to the French firm Orisha, and Textkernel to the American company Bullhorn.
An investor will only proceed if market conditions are favourable. The investor must also consider their limited partners (LPs), i.e. the insurers, pension funds, and other wealthy institutions that have invested in their funds. Since the timeframe for an exit after an investment is typically four to seven years, selling at the right moment is crucial.
Another record year fundraising
H1 2024 fundraising indicates that Europe is pacing for another record year of capital raised as European PE keep growing. Q1 was a record quarter, so naturally, we saw fewer new funds close in Q2. At the midpoint of 2024, GPs have raised 75% of last year’s capital. With the macroeconomic picture looking increasingly better, we expect this will continue fueling fundraising in the second half of the year.
Private equity comeback
According to De Visser, a lot of capital has been raised in recent years, but private equity parties were cautious with investments in 2023. “Now, however, they are enthusiastic about doing deals again and the capital needs to be deployed.”
An investment process generally takes around six months. “We’re currently experiencing a busy summer period and are hearing similar trends from other financial advisory firms. I anticipate a catch-up in the second half of this year, with several significant deals expected in the third and fourth quarters.”
“A consequence of this busyness is that private equity firms are becoming more selective due to their limited capacity,” explains De Visser. “They will concentrate on the most attractive IT companies that align with their investment mandate. This drives up the valuations of these ‘hot assets.’ As a result, investors must carefully consider which assets to pursue and might need to focus on less prominent companies that offer a higher likelihood of acquisition at lower costs.”
CFI notes that startups are now being evaluated much more critically than a few years ago, even amid the current AI hype. “Investors no longer blindly put money into startups. The focus is now on profitability and/or significant growth opportunities. The era of ‘cash burn’ investments is over.”
Second-quarter sprint
In the second quarter of 2024, CFI and Computable registered 99 deals, nearly matching the 97 deals from the same period last year and slightly fewer than the 109 deals in the first quarter of 2024. By comparison, during the peak years of 2022 and 2021, the second quarter saw 151 and 124 transactions, respectively.
De Visser observed a notable presence of both Dutch and Belgian investment partners during the April to June period. While foreign investors have long been active in the well-supplied Dutch IT market, relatively new local capital providers are now emerging. One example is the Belgian SAP service provider Expertum, which, with support from the Belgian investment fund Sofindev, has acquired the Dutch company Partners in Technology. Lunxi is also active, having acquired DataMobility and Infield ICT. These companies will collaborate on a platform for managed secure networks. The financing for these acquisitions was provided by Oak Tree Hill Capital.
Main Capital Partners
Furthermore, Main Capital has been particularly active in the past quarter, not only with the exits but also with various platform investments both domestically and internationally. One notable acquisition is that of German Doozer Real Estate Systems for its portfolio company Zig Websoftware.
Main Capital became the majority shareholder in Zig Websoftware at the end of 2021. Through a series of smaller acquisitions and the acquisition of Cegeka Real Estate Solutions in September 2023, Main Capital quickly transformed Zig in a leading IT provider in the Benelux housing construction sector. The acquisition of Doozer marks Zig’s first step towards further internationalisation.
Blinqx
Blinqx has recently made significant progress. After acquiring Hippoline, a data and business intelligence specialist for the mortgage and insurance markets, in January, the group completed two more deals in the second quarter. In April, Simplicate, which offers CRM and project management software, joined Blinqx. In May, EQili, which optimises periodic closing processes for local governments and medium-sized businesses, also came on board. With these acquisitions, Blinqx has completed four transactions in 2024 and is now exploring a potential acquisition of Scan Sys, which automates and digitises financial document flows.
Founded as Dias Group in late 2019 following the acquisition of Unit4’s Financial Intermediaries division, Blinqx rapidly became a key player in business acquisitions. The group now has around 400 employees and operates under various software labels in the financial sector and semi-government. The name was changed to Blinqx in June 2013 to reflect its broader scope beyond the original Dias products.
IT Services
In addition to software transactions, De Visser observed a substantial number of deals in infrastructure and other IT services during the second quarter. For example, Odin Groep acquired 2Invision, a provider of managed infrastructure and cloud services, from the Belgian investor Crescent. 2Invision is a significant addition to the services offered by Odin’s subsidiary, Previder. “Given the sustained high demand for these services, we anticipate similar transactions in the upcoming quarters.”
Source: Pitchbook, CFI database and Computable
