One of the topics introduced at EBAN Congress focuses on unlocking distributions in a market that has notably cooled since its peak in Q4 2021. Public markets in particular have witnessed a prolonged decrease in activity, with $B+ IPOs dropping to the lowest levels since 2016. Similarly, the number of M&A transactions declined significantly compared to previous years. At the same time, exits are vital for keeping the European tech flywheel going and producing capital, talent, and new innovative companies to the market.
Key facts about the exit landscape in Europe in 2023:
- There were 5 $B+ acquisitions of tech companies, though only a single VC-backed company was within that cohort (Kahoot sold to Goldman Sachs for $1.6B)
- Private equity was the main driver of $B+ M&A by being responsible for 3 of the 5 transactions
- 77% of M&A transactions were sized at less than $100M.
- Transactions valued at between $100M and $1B have seen a particular slow- down year-on-year.
- There were only 3 IPOs in Europe, which is far behind the pre-2021 levels
Unsurprisingly then, almost half of the GPs surveyed in the State of European Tech report stated they’re spending more time seeking for liquidity. Given the tight exit environment, fund managers are looking for alternative solutions in providing liquidity for its LPs, with some strategies gaining visible adoption.
VC Secondaries
Secondary sales, in particular, have grown in popularity, with VCs selling a slice of its fund’s investments – also known as strip sales. For example, recently Molten Ventures acquired a 19% stake in Seedcamp’s third fund for 8.5M€. In response to the increased secondary market activity, funds are rushing to capture this untapped potential. One of the most recent news saw Isomer Capital raising a new £100M secondaries fund.
Recently, Sifted reported that funds are also starting to add specific clauses to the funding round documents to allow more flexibility selling startup stakes. By including the portfolio sale clause, it would prevent triggering the rights of first refusal and co-sale clauses that would allow other investors to sell their shares alongside. Although still rare, lawyers think it could become more common.
Continuation funds
Another strategy to return cash to LPs has been to take a page out of the private equity playbook by establishing continuation funds. Continuation funds represent a type of transaction where assets from a fund that is nearing its term are rolled into a new vehicle, which can be continued to be managed by the same managers.
In the beginning of the year, Financial Times reported that a prominent VC Lightspeed Venture Partners is looking to sell $1B worth of startup-stakes by setting up a continuation fund. Others, such as HV Capital in Europe and Insight Partners in the US have already done so in the past.
Whilst a meaningful option to provide the much needed liquidation to LPs, it does not come without caution. Selling a part of the portfolio to a new fund likely means the valuation of the companies will be altered. This means part of the fund returns will be shaved off, i.e. original fund’s LPs are entitled to less cash.
Private Equity
60% of the 111 $B+ exits of European tech companies in the last five years was achieved through M&A. PE has historically been the largest driver of M&A activity in Europe, with 63% of the total transaction count being done by private European buyers in 2023. Although the general activity in 2023 has been significantly lower, the amount of capital ready for investing is at an all time high ($2.3 trillion globally). A similar story is expected about corporate buyers.
Once the interest rates drop and buyer sentiment improves, it is reasonable to assume the appetite for M&A returns. At the same time, there are more than 120 billion-dollar exit candidates that are lining up to IPO once the window opens up again. Hence, the future looks optimistic. (State of European Tech 2023)
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At the EBAN Congress
With the current VC environment in mind, Kaari Kink will dive into the venture capital specifics with Staffan Helgesson from Creandum, one of the most prominent VC funds in Europe. Kaari says it’s hard to name a success story that isn’t part of Creandum’s portfolio, having backed companies like Spotify, Klarna, Kry, Trade Republic, Kahoot, Bolt, Pleo, iZettle.
On the stage at EBAN Congerss Tallinn, Kaari and Staffan will be discussing exit stories from Creandum’s portfolio, how earlier stage VCs can contribute to the process, exit strategies and determining when to exit, engineering liquidity in the current market, and more.
Join Kaari Kink from Superangel and Staffan Helgesson from Creandum on Tuesday 21st May on the main stage of EBAN Congress Tallinn for what promises to be a super interesting discussion.
www.ebancongress.com
