The allure of single asset secondary directs

European technology companies are providing increasing opportunities for secondaries investors, says Roland Dennert, a managing partner at Cipio Partners.

Europe is home to an enviable array of up-and-coming venture-backed technology firms with hot new concepts. However, these companies need to develop their businesses further than ever before in order to complete an attractive exit. As a result, venture capital investors have to wait longer before exiting their portfolio companies, according to recent research. In the past, business angel and venture capital funds bought and held investments until the final exit via an IPO or trade sale.

However, IPO exits are proving tricky in today’s market. Only companies with substantially higher revenues and sustained profitability can achieve real liquidity on a stock market. Strategic buyers, on the other hand, demand more maturity. Many of the larger technology companies – such as Broadcom, Cisco, Google, Oracle, or Salesforce— have grown into much bigger businesses themselves, which is the reason they now often want to do bigger deals.

The lack of rapid exit options for technology investors in today’s market has paved the way for a new breed of growth investors, willing to do single secondary transactions. These transactions enjoy a surprising breadth of opportunity in the European market.

These technology-focused secondaries funds are able to tackle misalignment in the company’s exit plans: there will often be shareholders needing liquidity, while others want to continue growing the business. Single secondary deals enable a speedy exit for investors closer to the end of a fund’s life or looking to shift investment focus.

Cipio Partners, for example recently purchased shares in MyOptique Group (an online eyewear retailer) from its founder and former chairman. We also bought shares of Ipanema (a networking software business) from an early venture capital-backer and in Cint (a B2B platform for market research panels) from various early investors.

The European single assets secondary market for technology firms has been estimated at €1 billion per annum, according to in-house research conducted by Cipio Partners earlier this year. Experience has shown that secondary transactions can have a very positive impact on the companies concerned. Providing a liquidity option for shareholders has enabled some of Europe’s leading technology companies to go for the long-haul and refresh their shareholder syndicates with new deep-pocketed investors.

Roland Dennert is a managing partner focused on portfolio and origination management in Cipio Partners’ Munich office.