Investor Update – August 2023

Breaking the stalemate
Our latest market perspectives

The growth equity market has been stuck in an uneasy stalemate for the past six months. After a bruising 2022, tech investors came back to the market this year more cautious and unwilling to pay the premium valuations of the past. Founders, however, were not willing to accept these new terms and instead used a patchwork of internal top-up rounds, venture debt and cost cuts to extend their runway by two or three more quarters. The hope is that this would enable them to grow into their past valuations and raise – or achieve a quick exit – in a more bullish macro environment.

This stalemate is coming to an end. The near-term macro outlook remains
challenging, M&A activity limited and the companies’ cash runways are starting to run short. At the same time, many venture investors themselves are looking to raise their next fund and now need to demonstrate cash exits to their prospective LPs, not just the paper mark-ups of the past. This liquidity pressure is driving a growing deal pipeline which we expect to translate into steadily increasing deal volumes throughout 2024 as companies are forced to return back to the markets.

There remain record levels of dry powder in the market. However, we expect this to offer little valuation support in the growth equity segment. The vast majority of the dry powder sits in larger tech buyout funds where deal activity and valuations this year have remained just as competitive as in 2021. The growth equity market has shown starkly different trends in recent quarters with much more suppressed deal activity and valuations.

We expect 2024 onwards to become strong deal vintages for growth equity funds. Growing deal volumes and scarce liquidity will drive down valuations in the growth equity segment, while the underlying structural growth in the B2B technology market remains unchanged. However, challenges remain for tech investors. The software industry is undergoing a seismic shift due to AI and macro headwinds are changing software buying behaviour. Investors will need deep domain expertise and continuous learning to navigate these trends successfully – but those that succeed, will be rewarded with the opportunity for multiple years of outsized returns.

A successful final close and resilient growth
Yttrium firm update

Portfolio & exits: Our B2B technology portfolio is continuing to show resilient, strong growth. In H1, our fund II companies achieved ca.40% year-on-year growth with North America remaining the key growth driver. We are working actively with our companies to accelerate value creation through improved cost efficiency. These efforts are paying off with our fund II portfolio boosting EBITDA margins by ca.15 percentage points year-on-year in H1. Delivering strong cash returns to our investors remain the key priority. Following strong exit activity in 2022 (orderbird, riskmethods, ChartIQ), we are now also preparing the next set of companies for successful exits in the coming quarters.

New investments: Amidst a more challenging investment environment, we have doubled-down on our thematic sourcing efforts to identify the strongest performing, at scale B2B technology companies across Europe. In the first half of this year, we screened nearly 500 new opportunities with this approach and performed more detailed analysis on over 100 of these. We remain highly disciplined on company quality requirements and valuations and year-to-date we did not identify the deal opportunities that met our returns criteria. We see a strong deal pipeline developing for the coming quarters and are already now starting active discussions for multiple new deal opportunities.

People & platform: Talent and technology are the key pillars of our firm’s long-term success. We have made significant progress over the past two years building our fund’s technology platform, using software to automate and enhance our investment processes end-to-end, from deal sourcing to portfolio value creation. For example, we have recently integrated generative AI tools into our deal sourcing processes to help identify and categorize new deal opportunities instantaneously.

Fundraising: We successfully completed the final close of our second fund (DGF II) at EUR 403 million in May, a 15% increase vs. DGF I. We saw strong recommitment from our existing LPs and have retained the high quality, well diversified LP base of our first fund. We would like to take the opportunity again to thank all our investors for their continued trust and support and we look forward to maintaining a close working relationship going forward.