International demand for European tech firms will help drive activity in the second half of the year, Zak Ewen, partner at Battery Ventures, told PE Hub Europe. Ewen said the trends that underpin tech investments are still solid in Europe and the US.
Battery is a technology and software-focused investment firm with offices in Boston, San Francisco, Silicon Valley, Tel Aviv, New York and London. Recent deals include an equity investment in Berlin’s Vimcar and Zurich’s Avrios, a pair of cloud-software providers for the fleet-management sector, in January. In late August 2022, it reinvested in Forterro, a European provider of enterprise resource planning software for the industrial mid-market.
PE Hub Europe spoke to Ewen to gauge his outlook on deal activity and exit opportunities in the second half of the year.
What is Battery’s forecast for H2 in terms of GDP growth, inflation and interest rates?
Central banks are continuing to raise rates to fight inflation and the soft predictions they have given for H2 suggest that they are still worried about what lies ahead. We’re in a period where the data is maybe a bit ambiguous now. Hence, we expect that uncertainty to persist.
We are cautiously optimistic that GDP growth will improve in the second half. CEOs and executives are continuing the level of caution they exercised in H1 into H2. It’s not doom and gloom, but I don’t see a roaring comeback either. It is about prudence, and managing the business and level of uncertainty, for example extending cash runway and thinking carefully about capital structure given the cost of debt. We’ll continue to caution our companies to exercise a level of caution when balancing opportunity and risk.
What about dealflow?
Dealflow in the tech sector will be better and with time, more exit horizons will come to bear. There will be pressure from the private equity community with portfolio companies hitting maturity and firms pushing for exits ahead of new fundraising cycles.
The last 18 months have been a wait-and-see environment. The public tech markets collapsed, crossover funds shut down private market activities and at the same time, the macro environment worsened and interest rates were going up. That dust has settled. People know where interest rates are heading and can model it into their capital structure. It won’t slow down deal activity dramatically, but it will rebalance capital structures. The way deals are done will change. The expectation is that deal volumes will increase and there will be a recovery in H2.
What are the key challenges for dealmakers in 2023 and how are you meeting them?
GDP growth is low, and this means that the end markets that tech companies sell to are still down. The cost of debt is increasing, and this will continue in H2. However, in Europe, there is a robust, healthy mid-market tech ecosystem. Many American funds have opened offices in Europe in H1. There is appetite internationally for technology businesses in Europe and a big sample set to pull from, which will help drive activity in H2. This means there’s competition. There are multiple interesting intersections of a company throughout its development cycle and Battery can get involved at any of those intersections.
Europe is very fragmented. Naturally the tech ecosystem in Europe is equally as fragmented. In most end markets, especially software, the US will be 5-10 times the size of the same market in France or Germany, for example. There we tend to start with one business whereas in Europe, we think creatively around situations and consolidation. We expect to see more interesting deal structures in this region.
What kind of deals can get done today?
Given the reshoring trend and globalisation scaling back, this is bringing manufacturing investments back into Europe and the US. We’ve done a lot around ERP and PLM, and simulation software, and this will continue to be an area of focus for Battery. Other areas include the public sector; there are long-term trends around governments digitising across Europe and looking to the private sector to build tech to help them get there.
What are the exit opportunities for private equity-backed companies in 2023?
In Europe, it is strong. There are big funds with a lot of capital to deploy, and strategics that view the current dislocation as a buying opportunity. In the private equity market, options will remain strong for strong businesses. For mediocre businesses, it’s going to be challenging.