Jean Schmitt spoke to Kreos about his current view of European markets. Jean, formerly Managing Partner at Sofinnova Partners in France, co-founded Jolt Capital in 2011. Jolt is an independent growth equity firm focusing on the lower mid-market which provides growth equity funding to European high-growth technology companies in the mobile and cloud sectors that have near-term exit opportunities.
Jean is a successful entrepreneur and investor in technology, with deep technical insight. He was founder¬† and CEO of SLP InfoWare, which he sold to Gemplus for ‚Ç¨60 million in 2000. He then became VP, Telecom Solutions and Applications at Gemplus (now Gemalto, XPAR:GTO). He is currently a board member of Heptagon Advanced Micro Optics (Switzerland/Singapore), Inside Secure (France) and Softonic (Spain).
Jean, let‚Äôs talk about some of the deals we have done together and what you see as their characteristics:
Certainly, and I would single out four or five deals which have been characteristic of the positive way that we have been able to work with Kreos:
¬®¬†Heptagon Micro Optics: Kreos provided ‚Ç¨8 million of debt finance in multiple rounds to support the company‚Äôs growth through multiple economic cycles
¬®¬†PurpleLabs/Myriad: Kreos provided ‚Ç¨10 million for acquisition financing
¬®¬†Accent: Kreos provided ‚Ç¨1.5 million to finance working capital and new product development
¬®¬†Commprove: Kreos provided ‚Ç¨6 million to fund the working capital requirements caused by contractual cash flows deferred by up to 6 months
Can you identfy the particular ways in which Kreos was able to help you in those deals?
¬®¬†PurpleLabs/Myriad: things needed to be done in a hurry and Kreos understood what the deal was about. In that situation the investors (Sofinnova and EarlyBird) needed an additional investor who could understand what the company was doing and the opportunity.
A PE firm would have been too slow to complete the process, and with a history of cash-burn no bank would have backed the company. But Kreos was quick to grasp the opportunity and to support the completion of the transaction and provide the funding we needed.
¬®¬†Accent: here we were in a calmer situation where financing was needed while we worked on the next round. This time the transaction took a bit longer but this was due to the complicated company structure and with presence in two jurisdictions: an HQ in Luxembourg and operations in Italy, which Kreos was comfortable accommodating.
¬®¬†Commprove and Heptagon: the key point about both of these deals was that each company had historic periods of some difficulty, and Kreos was very patient and helpful to both companies at those times, and as a result enabled the companies to move forward with their growth plans.
Does that point to some general themes about the way we work together?
Yes: most importantly in general Kreos has shown itself in every case to be a very supportive investor to equity sponsors and their portfolio companies and you make sure that your decisions are based first on a thorough understanding of the company. In¬† practice, given the support that you provide, Kreos is good value, and you move quickly to get your funding in place, which is very important in most deals.
From our perspective, the ideal situation where Kreos can be the perfect partner is when there is the need to finance the acquisition of a cash generative business (say ‚Ç¨20-30 million revenues and ‚Ç¨2 million EBITDA) whose cash-flows can be then used to repay the Kreos loan.
It would be great to have your views of the current conditions for high-growth companies in Europe
Here I would always draw a distinction between core technology companies like Heptagon and technology-driven service companies like, for example, Kiala.
¬®¬†A tech growth company faces a larger challenge in raising PE backing because for a PE firm ‚Äútech‚Äù means venture and PE firms dislike venture-type deals unless the companies are very large and profitable. If the tech company is small it can still find some venture funding, but if it is late stage or growth stage then there very few funds, no more than 3-4 including Jolt, that are willing to invest in high growth tech companies even if these have passed the technology risk stage, and growth debt financing can play a major role.
¬®¬†In the tech-enabled service-based space, equity financing is available, but businesses in e-commerce that are seeing explosive growth may be interested in less dilution at this phase, so may prefer to supplement a more limited equity financing with growth debt financing.
Where are you seeing opportunities for your future deal-flow?
Jolt is experiencing excellent deal-flow. Every day we are seeing more interesting deals, finding compelling European tech companies that nobody seems to know about. For example we recently invested in the largest global software downloading portal, Softonic, which is a Spanish company with ‚Ç¨75 million in revenues, 45% EBIT and growing fast. Nobody knows them in the Valley or London, and they don‚Äôt have ‚Äúmind share‚Äù with traditional equity providers, so this provided a great opportunity for Jolt and our co-lead investor Partners Group at a very attractive valuation.
We are seeing many very interesting companies in the ‚Ç¨25-50 million revenue range with 10-15% EBITDA that are looking for capital for a variety of reasons including: growth, acquisition, expansion into Asia, repayment of old debt, management change, strategy change, next-step investors, reinforcing the balance sheet for a big deal etc. These companies have typically not been hit by the EU recession because most or part of their market is outside Europe.
So, are you still seeing a financing gap where European SMEs are finding it hard to get debt financing?
Yes, there is a very small amount of debt available now from banks. Some banks have structured themselves so that they now have some allocation for financing SMEs, but since there is little debt available for high growth companies,¬† a product like Kreos‚Äôs is critical in this space.