From Recurring Revenue to Loyal Customers: The Trends Driving Tech Emissions | White & Case srl


  • Leveraged loan technology and IT-related emissions in Western and Southern Europe nearly doubled from pre-pandemic annual levels to €19.9 billion by the end of 2021
  • Issuance of high-yield tech and IT-related bonds in the region hit an all-time high of €7.3 billion by the end of 2021
  • Seed debt issuance in Europe had already reached a record annual total before the end of the third quarter of 20211

Europe’s tech industry continued to strengthen in 2021, with mergers and acquisitions and lending activity in the space booming as investors across multiple asset classes took advantage of the growth and continued resilience of the technology sector.

The shift to working from home due to COVID-19, along with the rise in digital learning and online shopping and entertainment in 2020 and 2021, drove earnings growth across the tech sector.

Safe and secure technology was a must in every household, which ensured that tech companies were kept busy, increasing revenue and causing reconciliations. This in turn has created opportunities for cybersecurity companies – Dealogic data shows 57 cybersecurity-related M&A deals in Europe in 2020 compared to 69 deals in 2021.

Fintech companies have also quickly realized the benefits of an accelerated shift to things like online banking and contactless payments. This trend has been growing steadily for years, but has drawn significant attention in 2021, spurred by an explosion of special purpose acquisition company (SPAC) deals. As a result, fintech-focused Pegasus Europe and EFIC1 were two of the biggest SPAC deals in Europe in 2021.

The evolution of business models based on stable recurring revenue (from Netflix to Spotify) and stable customer bases (from tax software Intuit to Shopify) has only added to the attractiveness of the sector for investors looking to mitigate downside risk.

These strong underlying drivers helped the STOXX Europe 600 Technology Index climb 25% in calendar year 2021, outperforming the STOXX Europe 600 by around 7%.

M&A activity has also been buoyant for the sector, with 488 technology takeovers totaling €49.2 billion in 2021, accounting for almost a third of all European private equity (PE) deals. , according to Merger market The data.

Across all tech sectors, from fintech to cybersecurity, investment levels are steadily rising, a trend that shows no signs of slowing in 2022.

The strong performance of the sector makes it very attractive for investors in leveraged and high yield loans. For tech borrowers positioning their companies for acquisition, debt markets have been a useful source of capital to fund their growth before M&A deals are closed.

Issuance of technology and IT-related leveraged loans in 2021 amounted to €19.9 billion in Western and Southern Europe, according to By debts. This was well above the total of 13.8 billion euros for the year 2020 and almost double the 10.6 billion euros of emissions recorded before the pandemic in 2019.

High-yield issues for technology and computer-related credits were equally strong. By debts data shows that in 2021, emissions in the region reached a record high of €7.3 billion, surpassing the previous annual record of €4 billion recorded in 2018 and nearly tripling the annual emission of 1 .7 billion euros in 2020.


Technology and IT leveraged loan issuance in 2021 was 44% higher than the full year 2020​​​​

Startups are gaining momentum in the debt markets

Lenders are so excited to hitch their wagons to the tech sector that they are exploring new channels and debt products to increase their exposure to a wider range of potential borrowers.

Debt provisioning for startups, for example — which is structured to provide fast-growing companies that don’t yet have positive cash flow access to debt financing — hit record highs in 2021, as Growing interest from tech startups and a growing number of new entrants on the lender side have seen issuance soar.

According to figures from database management firm Dealroom, European startups raised €8.3 billion in debt by the end of the third quarter of 2021. This is a 41% increase compared to €5.9 billion in funding secured in calendar year 2020 and ahead of the previous total annual record of €8.1 billion secured in 2017.2

Penetration of venture capital and start-up debt in Europe has always been a fraction of that in the United States, but there are now signs that European markets are closing the gap. Startup borrowing in Europe has more than quadrupled since 2015, when the market was worth just €1.6 billion, and adoption is now growing twice as fast as in the US.3

Debt financing provides start-ups with lines of capital that do not dilute existing shareholders and allows companies to build a credit history. This is vital for companies considering tapping into major debt markets later in their development. For lenders, the product provides exposure to fast-growing technology credit early in the development curve.

Industry surveys show that start-ups that use risky debt products are likely to do so again.4 Given the stickiness of the product, as well as new market entrants and falling prices, the growth avenue for start-up debt in Europe looks promising.

Issuance of leveraged loans and high-yield bonds in technology and IT-related sectors (quarterly)

Recurring revenue structures in the foreground

For mature technology assets that are too large for seed debt financing but have not yet achieved sufficient scale to access leveraged capital markets, the emergence of recurring revenue debt provision has provided an attractive option for raising capital.

Recurring revenue debt unlocks additional funding by providing credit based on repeatable or subscription-based revenue. The product is ideal for technology companies that provide mission-critical software and services that customers rely on for the day-to-day operations of their businesses. Lenders have been able to provide capital to these borrowers using recurring revenue structures, even though the companies do not yet have positive EBITDA.

Terms and prices vary from loan to loan, but recurring income loans are generally more expensive than vanilla loans and have a lifespan of two to three years. The credits are expected to break even and transition to conventional cash flow lending options at that time.

This funding strategy has helped fast-growing venture capital-backed tech companies bridge to an IPO or increase profitability.

New loan streams like venture debt and recurring revenue loans have been well received by European tech startups. With lenders keen to tap into the industry’s strong growth fundamentals, the year ahead is set to break more records as European tech companies of all sizes gain access to larger pools of capital than ever before.

1 “Europe Raises Record Amount of Debt Financing”. Kai Nicol-Schwarz. Thames. September 7, 2021.
2 Same
3 “Europe Raises Record Amount of Debt Financing”. Op cit.
4 The state of European technology. Reporting. 2020.

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