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Debt: a new growth opportunity for European tech companies?

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Undoubtedly, from start-ups to large international groups, the tech world has been hit hard since the beginning of 2022: falling valuations, bankruptcies, mass layoffs… It is accompanied by a sharp decline in capital flow. And while these sweeping changes have upended the post-pandemic order, they have served to defund unsustainable and unprofitable business models.

Subsequently, debt financing has become an important source of support for entrepreneurs. Proof of this is that 2022 has proven to be a record year. The total amount of debt invested in European technology companies has doubled compared to 2021, reaching more than 30 billion euros, in a sign of the maturity of the European technology ecosystem.

A moving market favors debt issuance

A favorable environment for mergers and acquisitions from a buyer’s perspective, and a less attractive fundraising environment, contributed to debt issuance of technology companies in Europe reaching €30.5 billion in 2022. This, despite global debt issuance down 19% from the previous year.

In fact, debt use cases have evolved. There is now a greater range of credit instruments available: growth debt, risky debt, senior debt, discounted debt, royalty, collateralized loan obligations (CLO), private debt funds … This development has made it possible in particular to revise the company’s valuations, allowing Adjust prices to better reflect potential risks.

UK technology companies remain the largest issuers of debt in Europe, nearly doubling year-on-year to €12 billion in 2022. Its leading position is due to the large number of financial technology companies, which account for around €4.8 billion in loan capital. For its part, France issued 1.8 billion euros in loans – 6% of the issuances on the old continent.

At the same time, we are witnessing significant sectoral change: the volume of debt contracted by companies seeking to transform the energy sector has exploded: 4 of the 10 largest debt collections in Europe have been carried out by energy transformation companies. But fintech still dominates, accounting for the largest share of the loan market, and nearly doubling the amount of debt raised from €4.3 billion in 2021 to €7.8 billion in 2022.

Opportunities that attract more and more

For technology companies looking for financing and particularly those in advanced stages of development, debt financing is an attractive alternative for raising funds. And many companies that had not yet considered borrowing are now realizing the obvious benefits of debt. For example, founders or entrepreneurs can get paid more quickly and simply, while retaining control of the equity of their startup. Another benefit is that paying off debt can help strengthen financial discipline and improve cash management in a company.

Additionally, lower valuations have created attractive opportunities for buyers. A significant increase in M&A activity can be seen when companies start looking for deals. Although higher interest rates make debt capital more expensive, acquisitions, funded from a judicious mix of debt and equity, can help boost profitable growth.

Finally, this increase made the European debt market more attractive and led to intense competition between lenders. The latter seeks to attract borrowers by offering more favorable terms, particularly with regard to equity appreciation and debt amortization. This increased competition has also benefited institutional investors willing to invest in this asset class. Current borrowing conditions better reflect risk/return criteria and these investors seek to diversify their portfolio by investing in assets that offer higher returns, while minimizing risk.

The outlook for 2023 is cautiously positive, and the need for deferred capital should be greater this year, given the relatively low percentage of companies that have equity raised in 2022. Debt issuance by technology companies in the growth phase is likely to continue at a brisk pace due to confluence several directions. This development reflects the health of lending to tech companies in Europe, so moving away from “grow at any cost” becomes a healthy market development.

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