Staffan Mörndal

Compared to this time last year, when we were working on the last edition of this report, the M&A market has shifted hugely. What is your assessment of the current state of the deal environment? Do you think deal levels will drop substantially next year?

There are going to be fewer majority-type deals, I think, in the coming months than there used to be. If there is no particular reason for an exit, you will probably wait. However, if you are a growth-stage company and need to fund negative cashflows, you need to do primary fundraising.

In response to the current market, most companies are therefore refocusing on less capital-intensive paths to get where they want to be, with a higher focus on profitability than growth. Therefore, we expect to see lower levels of activity in the market, and changes in the types of activity – say, an increase in distressed activity, for example. I would also say that the average asset is not performing as well as it did a year ago; there are a lot of companies that are trying – and failing – to raise money. 

How does that change the dynamic? Does it take longer to get deals done, if companies aren’t performing as well as they used to?

I don’t think deals take more time than they used to do. However, people are more uncertain about where the environment is going. In general, it’s difficult to have a view on things like the Ukraine effect, energy prices and inflation. People are more uncertain – you also have a market that is more of an investors’ market than an entrepreneurs’ market, if you will. As an investor, time used to really work against you – everybody had to work really quickly, because otherwise you wouldn’t get the deal done. Now, it’s a little bit different – processes tend to drag out a little and prices are more likely to decrease than to increase if there are delays.

What makes Verdane a bit different is that we have always done different types of deals. We do growth tech – that’s our space – but within that we do different sizes of deals and also different types: minority, majority, and portfolios. Minority deals are probably at a similar level as before, while majority deals have decreased – for those, it tends to be possible to wait and hope to get a better price. And then, we see more portfolio opportunities than we have the last two years. Those are deals involving GPs, LPs, or corporate VC or corresponding market actors who own several assets, often minority stakes. For example, a corporate VC with 30% ownership stakes in a handful of companies whose parent company decides to discontinue the corporate VC arm. Or you might have a GP that decides to sell to make it a bit easier to fundraise, or a GP finding itself in a situation where it is prudent to derisk its portfolio by selling tranches of its holdings. 

With the climate for fundraising being more difficult this year than it has for the past couple of years, LPs may insist on being shown a few KPIs before they commit to a new fund. There are a lot more drivers for portfolio deals now than there used to be.

You mentioned that Verdane specializes in tech-focused deals. The industry has seen valuation multiples come down in the past year – how has this affected deal activity? Is it difficult for buyers and sellers to agree on price? Does this mean we will see an increase in creative solutions to bridge expectation gaps?

Absolutely. I tend to see a lot of that, no matter what. But, of course, what makes it extra difficult now is that you both have a shift downwards of multiples, no matter if you look that EBITDA multiples, contribution margin, or sales multiples, but at the same time you also have uncertainty about what the multiple is based on, especially if it’s EBITDA. You might have high fluctuations in grain prices or energy prices or other possibly short-term effects which could affect EBITDA margins, even if the mid- to longterm outlook hasn’t changed. So, you definitely get some discrepancies. And, of course, creativity can solve some of that. 

I would agree with you that on average more deals are being done with creative structures than a year or two ago. Technology has been an interesting sector to watch – it has grown to take up a significant portion of overall global M&A over the last few years.

Do you think we will see a cooling off in deal activity next year?

I think that, in the last two years, basically everybody has tried to do technology. No matter if you had previous experience or obvious capabilities in your team. I really believe that technology will continue to shift the world and will continue to create really interesting investment opportunities, but probably some of the less experienced investors in the technology space will drop out in the next couple of years.

I don’t think you will see a significant decrease in the levels of activity from people who are set up to do technology investments, like Verdane. We have data scientists, we have experts in CRM, online marketing, databases setup, CTO due diligence etc. We have a data warehouse with more than 80 companies in our portfolio with APIs sending us data every day. All of that helps us to be more data-driven.

I think the barrier to entry for people who want to do tech investments but haven’t set something like this up is going to continue to grow. And I think as times get tough, we will see several of those players leaving the tech space and going back to deals which have more stable cashflows but slower growth.

Given the more challenging macroeconomic environment, do you expect PE firms to hold onto portfolio companies for longer?

Yeah, I think that a lot of firms will ask for extensions and keep companies until they see that the climate for an exit is better. Some LPs may not be too happy about that and, in some cases, that could trigger portfolio transactions. But many, of course, will understand that you might need another year to find the best exit.