Schizophrenia : Foreign buyers gobble up UK's growth software businesses?



At the same time that Schneider Electric was considering a bid to acquire the remaining shares in AVEVA, the UK FTSE listed Industrial software business, Canada's Opentext announced its acquisition of Microfocus for $6bn. EMIS the leading healthcare software provider is acquired by American giant UnitedHealth Group. Thomo Bravo's bid to acquire Darktrace - the Cyber Defence firm, also for $6bn collapses, as the buyer gets cold feet.


What do all these Uk software companies have in common?


They were all publicly listed in the UK. Leaving Sage as the only software company in the FTSE 100. Thats shocking and reminded me of our first podcast, in which Leo Apotheker, ex-CEO of SAP, argued that Europe needs a public market that truely understands software and technology like the US NASDAQ, if we are to build global success stories in our sector. The question in my mind, in a period of more general downward pressure on tech stock valuations, is are these firms being undervalued in the UK public market, making them vulnerable to take-over? If they were listed on NASDAQ would they have been treated (valued) differently.


Layered on top of this, mixed messages from the market on exactly what is happening on valuations and there seems like a disconnect between the stories (above) in the public markets, and private investing via private equity or venture capital.



Nestled in amongst all this angst and noise I read an article this week in the Times titled "Hg Capital Trust rises above technology sector turbulence". Hg, as you may know, invests heavily in European tech and software, as private equity investors. Normally the performance of the portfolio businesses of a PE company are kept rather close to their chests. However, the Hg Capital Trust, is a publicly listed vehicle, in the FTSE-250. that gives public investors the chance to invest behind the performance of their private portfolio. As a consequence they have to report the performance of their basket of investments. And amid pressure of tech valuations in the public market, Hgs investments valuation pressure was offset by strong trading performance. Leading to a 1.8% increase in net asset value per share, valuing that portfolio at over $2bn. Their share price rose 8.3%. Hg pointed out that £1000 invested with them 20 years ago, would now be worth £18,370 versus an equivalent investment in the FTSE-all share index which would be worth £3,521.


Whilst there has been a clear slow down in Venture Capital investing in August 2022, with $25,2bn invested globally being the lowest monthly total for two years, (down 52% year over year, and 10% month over month). VCs & PE firms are still investing and raising new funds. EQT announced that it had closed $2.4bn for its first European Growth fund, targeting European & Israeli tech in sectors such as enterprise, consumer, health & climate. It already has some investments in the fund, like Lithuanian second-hand goods marketplace Vinted and cloud banking platform Mambu


Private Equity houses and Venture Capitalists are expert investors in the sectors in which they focus, with deep domain knowledge, leading to the ability to hopefully pick winners. Perhaps public investors lack that level of nuanced knowledge and expertise in tech, leading to disparity between public and private company valuations. Could this phenomena lead to higher quality businesses being in private investors hands, and relatively lower quality businesses being public - perpetuating a continued lack of confidence in the public markets in Europe in tech companies?