Fireside Session about Tech Investments in Europe

From 26 February to 1 March the biggest and one of the most important events in Private Equity and Venture Capital took place in Berlin – the SuperReturn. Two of OMMAX’ managing partners, Toni Stork and Dr. Stefan Sambol, have been at the fair to capture the most recent developments of the industry. Asking the expert attendees at the event, they pinned down one particular pain point: European companies seem to have developed a certain restraint regarding tech investments. How does this bias come when digitization on the other hand is promising a wide range of chances and possibilities for enterprises? Toni and Stefan had a discussion on this in a brief Fireside Session.

Anamnesis of a complicated disease pattern 

Investing in tech companies leads to a better ability to grow in dynamic markets, develop deep relations to clients and in the end, supplant competitors. So, what is the pain point of enterprises with regard to investments in Europe?

The European market is characterized by a high investment pressure on the part of the financial investors, which is due to the high liquidity in the trading area. 

This causes company prices to continuously rise and leads to significantly inflated company valuations. Additionally, record multiples are paid on the operating profit (EBITDA) of companies which is pushing prices even further. Investors therefore have to evaluate concisely before being able to make a profound decision.

Another inhibiting factor for investments are scenarios of rising interest rates in the future that pose potential risks which could jeopardise the refinancing of take-over loans. This will be a major challenge in five to ten years – a time span quite short for longterm-planned investments.

What are the key-problems of the current investment situation in Europe?

Investment funnels are significantly shorter today, than they were only five years ago. Companies don’t invest enough time to conduct thorough, detailed company audits – this leads to imprecise decisions when evaluating whether a company has the highest potential as an investment.

Sourcing deals is becoming increasingly demanding for investors. Within sectors of small and mid-cap companies there is growing competition for the leading investment opportunities. Larger funds are targeting on companies in these sectors – thus rivalry is intensifying.

Furthermore, exorbitant company valuations are extending the holding period for an investment. In former times, companies had a certain timeframe to achieve a return of investment. Nowadays, with an increasing number of multipliers, significantly greater external capital is flowing into the transactions. Companies need longer roadmaps to reach their profit targets, which adds performance pressure, as well as making them heavily dependent on investor capital.

Competition and unsteady political times — Europe’s investment challenges

From a financial investor's point of view, it is becoming increasingly difficult to identify attractive companies as the market is highly competitive: The focus of investing enterprises lies on medium-sized companies between 150m and 1.5 billion corporate value. But as European mid-market-companies are currently growing in a promising rate, the competition for being the first to detect the best of the best has increased a lot. Even large financial investors (e.g. Apollo, KKR) are now shifting their focus to those emerging firms from the EU.

Due to their consequences, and the fact that they are difficult to foresee, geopolitical risks pose another major challenge. To name only a few keywords: developments in USA and China, rising taxes on imported goods, the risk of a trade war and crises not only in Europe and Turkey – there are many reasons why investors are hesitant when it comes to making decisions with far-reaching impact.

Steering developments into a positive future

Identifying new value levers capable of reinstating inflated company ratings are key for the re-establishment of an investment-friendly environment. Digitization plays a major role in this process because it promotes efficiency and strengthens the bonds between service providers and purchasers, creating mutual trust.

To further support the development of trust between market participants, the "brick and mortar" business model should be expanded. Rather than in online-only businesses, personal face to face contact between investor and company makes it easier to pin down the doubts of the conversational partner.