Asian investors could have a transformative effect on the European technology industry, according to analysis by Magister Advisors.
In recent months, Chinese consumer-tech giant Tencent acquired Finnish games developer Supercell for $9B and Softbank paid $32B for the UK’s world leading mobile chip company ARM; unprecedented investments in European tech. Both are real “platform deals,” creating entirely new European business units for two very well-funded Asian buyers.
But the Asia-into-European tech trend is much more broad-based. Asian buyers will snap up $2-3B worth of smaller (sub $500m) European tech companies this year, up nearly 10x from 2013 levels.
Areas of specific interest are broadly based, and overall activity growing fast. Horizons Ventures, the HK VC, has led two European Fintech investments in 2016 so far – N26 ($40m) and friendsurance ($15m). Beijing Kunlun Technology acquired Norway’s Opera Software browser operations for $575m, in addition to leading £22m funding round for LendInvest, a UK online lending platform. And investors as diverse as Khazanah (Malaysia’s sovereign wealth fund), Temasek (Singapore’s investment arm) and Cocoon Networks (investment vehicle for UK investments of China Equity) are expanding European offices to access tech deal flow.
Magister Advisors predicts that in 5 years up to 30% of European tech M&A and investment will be driven by Asian buyers; translating into c. $100B annually into Europe. The UK remains the destination of choice; over 1/3 of European tech investments and M&A since 2014 have poured into the UK tech scene.
There are a number of reasons why this is set to explode:
- Chinese tech giants are generating far more cash than they can profitably deploy in China. Alibaba’s annual cash generation has jumped 6x to nearly $9B in just 4 years, while Baidu’s market value has soared from $1B to $64B since IPO just over a decade ago, all while at the same time China’s growth rate is slowing. This creates two reinforcing trends spurring international investment. First, it naturally drives local tech giants to look further afield for growth. Second, with slower growth comes less requirement for local investment, yielding even more annual cash (albeit not forever). Imagine Alibaba having $15-20B of cash flow without much need to invest locally and you have a major international tech deal-maker in the offing.
- Local growth rates are slowing – China’s 2015 growth was the lowest in 25 years. The opportunity to scale to $1B+ in local revenue in 4-5 years is rapidly fading, and many ambitious local success stories need to look further afield for either a technology edge or additional markets to continue rapid expansion.
- English is sweeping China – More people are learning English in China than in Europe. Over the next 20 years, English-speaking, internationally oriented Chinese students will take positions of power in cash-rich tech players, creating a cadre of tech leaders confident in expanding beyond Asia.
- There is a huge desire to “buy the best” abroad and bring it back home. Demands for proven, transformational technology has never been greater in the region. For example, Chinese pupils are entering the education system far faster than the country can deploy qualified teachers, leading to intense interest in education technology. In fin-tech, world-class European firms are seen as attractive tech weapons to shake up stodgy Asian banks and insurers.
- European tech companies are more capital-efficient than US counterparts, making them a safer bet for profit-oriented Asian investors. With less early-stage capital historically available in Europe, companies have spent less and gotten profitable faster. This balanced approach inherently appeals to profit-minded Asian investors, who are cautious about pumping money from a distance into high burn-rate Silicon Valley start-ups. Perverse as it may sound, the lack of historic capital in Europe is a driver for attracting unprecedented Asian capital into Europe.
- Accessing huge Asian markets best done via local partners – For European tech companies, the market entry benefits of a large Asian investor/acquirer are clear. There is no such thing as an Asian market; even mainland China, Taiwan and Hong Kong are entirely distinct markets. The adage about Europe applies even more to Asia; going alone into several Asian markets is a bet-the-company decision hardly any European tech CEO would make. Gaining a significant Asian investor who is motivated to help “bring the technology home” can transform a European tech company’s reach into the region.
- Valuations in European tech remain more attractive than top-tier US start-ups. Many US start-ups still demand $1B+ “unicorn” valuations despite being years away from making money; at last count, there were 100+ US tech unicorns across all tech sectors. This makes it hard for Chinese or Asian strategic investors to justify a major strategic stake, or full acquisition. In contrast, Europe has created only 15 unicorns, and many European tech companies are available for still-high, but at least justifiable, valuations.
Victor Basta, managing director of Magister Advisors, said: “Across Europe, technology stands out as the fastest growing sector in an under-performing continent. Asian interest may therefore seem to some like “selling out” the family jewels. However, there is no greater validation for how far European tech has come in the last 20 years, than how much interest it is now attracting from world class strategic investors 10,000 miles away. We predict that this investment will have a transformative effect. Asian dragons will put talk of unicorns in the shade.“