Active Benelux Tech M&A market defies summer slowdown
Nearly two years after reaching its zenith in Q4 2021, the Benelux M&A market remains robust, with transaction numbers in the past five months holding steady. There are no indications of a slowdown. It was a quarter that began with a budding recovery in equity and debt underwriting an stabilisation following the bank minicrisis. Contrary to tradition, the third quarter of 2023 witnessed a similar number of deals as the second quarter, despite the typically quieter summer period. Since the financial market peak towards the end of 2021, we have seen Benelux PE deals become smaller as sponsors shift away from large deals in favour of smaller add-on-type deals.
Benelux Tech M&A market outlook
This drop in M&A appetite corresponds exactly to when central banks in Europe started their latest cycle of interest rate increases, going from near-zero rates to 4% for the Eurozone and 5.25% for the UK. This tightening of monetary policy has been in response to high and persistent inflation, which has rocked the continent, stemming from COVID-19 and the Russia-Ukraine war.
Another unwanted consequence of higher interest rates is that borrowing costs have soared, making large M&A transactions more costly as these often require significant debt financing. This has often led financial sponsors to turn to private credit, an industry that boomed in 2023 and is forecast to double within five years. Private credit is often a more expensive option but tends to be quicker to execute.
The impact of uncertainties extended beyond the IT sector, affecting the entire market. Factors like increasing interest rates, geopolitical tensions, a sluggish economy, and ongoing restructuring efforts played a role. In the Netherlands, repayments related to the NOW scheme and postponed payroll taxes further complicated the investment decision-making process, leading to considerations of whether to forge ahead or postpone. Similar to how central bankers are waiting patiently for interest rate rises to ease inflation, dealmakers are waiting for clearer signs of a recovery.
Continued favourable conditions for PE exits
Certain IT deals may have been postponed to the third quarter due to these factors. Moreover, the IT sector stands out in comparison to other industries for its relative strength. This is evident in the numerous private equity exits, indicating that investors have not become hesitant to divest their interests in companies.
Looking at the top 20 exits in 2023 YTD, we note that more than 35% are Secondary Buyouts, which we define as when a PE investor receives a controlling ownership stake in a target company (not an add-on) that is already backed by a PE investor. This can occur for a range of reasons, including the need to offload assets due to the holding period, asset maturity, liquidity preferences, a change in the underlying business strategy, or simply an interesting bid from a buyer.
A noteworthy instance of a Secondary Buyout, is the acquisition of TestingCo from Green Park Investment Partners to Exponent Private Equity, a UK-based investor. TestingCo serves as a prominent independent platform for software testing and is the parent company of renowned brands such as Bartosz, Squerist, and PTWEE. With the intended acquisition in TestingCo, Exponent is further solidifying its presence in the Netherlands, building on the successes of previous investments in Greetz, Pokon, and Albelli-Photobox Group. This transaction emphasises the trend of foreign investors engaging or expanding their presence in the Netherlands.
New capabilities within software
Software continues to attract long-term investor interest: New capabilities within software are drawing in buyers to strengthen and transform their businesses through M&A. Private equity investors maintain a steady outlook. Augmenting tech platforms through add-on investments remains a popular strategy. For instance, IT service provider Arcus IT Group, with backing from investor Egeria, acquired fellow industry player JSR Professional Services. Additionally, Vortex Capital facilitated the acquisition of web application developer Poort80 by Mybit. RPA specialist Ciphix also embarked on its inaugural add-on acquisition: the acquisition of Webflight, backed by Mentha Capital.
Notably, in the third quarter of 2023, Visma finalised a significant transaction: the acquisition of ZorgDomein, the largest independent digital healthcare platform in the Netherlands, delivering digital solutions for the secure and standardised exchange of patient information among healthcare providers, including general practitioners, hospitals, mental health institutions, and laboratories.
Digital marketing continues to be a dynamic and evolving field
The digital marketing industry is a multifaceted field, covering a range of specialisations including website development, SEO, campaign management, CMS implementations, and social media channel management. This sector is currently witnessing a trend of consolidation, as agencies combine different areas of expertise through strategic acquisitions.
An intriguing example from the third quarter of 2023 is the case of United Playgrounds. During this period, the digital marketing agency executed another acquisition, specifically acquiring e-commerce specialist De Nieuwe Zaak. Founded in 2022 through the merger of LiveWall, Wave, 100%Email, and 100%driven, United Playgrounds strengthens its acquisition approach through a partnership with Standard Investment.
Thriving EdTech market
The software domain within the EdTech market is gaining momentum due to factors like lifelong learning, distance education, reskilling, improved measurement of educational outcomes, and the emergence of course marketplaces as driving forces. These advancements render the EdTech sector an attractive opportunity for potential investors.
As an illustration, Pride Capital aided Archipel Academy, a spin-off of Schouten & Nelissen, in enhancing its learning management platform. The firm took a notable step forward by acquiring Springest, a marketplace offering an extensive array of over 300,000 courses and training programs from a diverse pool of more than 8,000 providers. This acquisition is a strategic and complementary addition to the current platform. Another example is the Amsterdam-based learning platform, Lepaya, which secured an investment of 35 million euros to expedite the integration of Artificial Intelligence. Towards the close of 2021, the company had also received a comparable investment. Lepaya leverages both artificial and human intelligence to deliver employee training via online, offline, and virtual reality mediums.
EdTech companies are showing a growing inclination towards offering courses focused on regulation and governance, indicating a promising avenue for future expansion.
Remarkable bolt-on acquisitions
The third quarter of 2023 witnessed a diverse array of deals. Among the most noteworthy transactions was the acquisition of the American IT service provider CTS by Cegeka. Cegeka’s proactive move is quite remarkable, as such acquisitions typically happen in the opposite direction. Equally impressive is the acquisition of Cegeka Real Estate Solutions, the leading housing automation provider, by industry peer Zig, supported by Main Capital Partners.
Positive momentum in the fourth quarter
No signs of a summer lull were evident. The outlook for the fourth quarter of 2023 looks promising, as we’ve experienced increased activity since the summer, indicating an upward trend.