Rollup fundraising 101. Guest post: How to raise growth/venture debt?

Introduction to Atempo Growth

Atempo Growth launched its debut fund of €270M+ in January 2022 and provides flexible debt financing to support European technology companies throughout their entire lifecycle. The team has over 60 years of combined growth debt experience and have worked with more than 150 high-growth technology companies across various markets and strategies, including SaaS, eCommerce, FinTech, BioTech, and Roll-Ups. Atempo offers flexible capital for a range of use cases, such as runway extension, funding for M&A strategies, and SPV financing. Decalia SA and Banco Santander are among the investors included in Atempo’s LP base.

Tech roll-ups backed by Atempo

Combined with this there are multiple roll-ups at various stages within the Atempo deal pipeline.

Playbook for clearing Atempo IC

The underwriting for roll-up strategies will typically be focused on the following points, amongst other considerations:

• The underlying assets being ‘rolled-up’: 
  • How predictable are the revenues of the assets?
  • What are the margins of the assets?
  • How are the assets valued (e.g. EBITDA multiple vs. revenue multiple)?
  • How much competition is there for the assets and how may that impact valuations going forwards?

• The team executing the roll-up:
  • What is the specialist experience of the founding team (e.g., experience of the platform on which the assets operate; experience of operating and exiting an asset within the market; etc.)?
  • What is the generalist experience of the founding team (e.g., M&A; finance; etc.)?
  • What’s the plan for further hires?

• The amount of capital raised to support the roll-up and where this capital came from:
  • Although expectations are not the same as with traditional venture/growth debt (i.e. where cash equity is typically greater than debt raised), the amount of equity raised, the credentials of the investors, and the further availability of equity still plays a role in the debt underwriting.
  • Do your investors have experience with roll-up strategies?

• The viability of the roll-up strategy as demonstrated by comparable companies:
  • Has a roll-up of similar assets already taken place and charted a path to success (e.g. large SaaS aggregators such as Constellation; Moonbug and Youtube IP; etc.).
  • Is the market currently inhabited by large players focused on organic growth, whilst there’s a long tail of attractively priced, fragmented operators that would be ripe for consolidation? If so, this will provide debt underwriters with comfort too.

• The achievability of the roll-up plan:
  • As the roll-up will be acquiring profitable assets, to mitigate factors such as low cash equity vs. debt and limited-to-no prior acquisitions, a lender may ask for leverage covenants to protect from material underperformance.
  • These covenants will be ratios such as leverage set-off the forecast plan plus headroom, so it’s important all parties are bought into the forecast plan.

Key features of a debt term sheet

Beyond the standard terms found in venture/growth debt term sheets, such as the interest rate, quantum, repayment terms (split between interest only and amortisation), and fees, a roll-up venture/growth debt term sheet may include some or all the following:

• Security structure: a lender may want you to create a company organisational chart that consists of a topco/parent (the entity that will raise equity), with an AcquiCo sat beneath it which will act as both the borrower and the entity that will ‘own’ the acquired assets.
• Covenants: as mentioned, some of the traditional risk mitigation factors of venture/growth debt are not present in roll-up strategies. Combined with this, the presence of asset-level EBITDA allows for the setting of leverage (debt divided by LTM asset-level EBITDA) covenants. Accordingly, a lender may often seek covenants, but it is important to ensure that the covenants are set in a manner that they will not restrict the ability of the business to execute its roll-up strategy
• Warrants and/or equity or equity-like exposure: a standard feature within venture/growth debt, however for roll-up strategies, especially those where the debt is provided early in the company life cycle (e.g. at inception or before material acquisitions have been made), the lender may seek higher coverage of warrants and or further participation in equity upside.

Diligencing your lender

There are two fundamental aspects a roll-up strategy requires from its lender(s), it will need a facility that provides two thibgs: capital efficiency and certainty of funding. To elaborate:

• Capital Efficiency. A good lender appreciates the importance of providing a meaningful debt ticket relative to the amount of cash equity raised and understands risk can be mitigated by underwriting continuous value creation through the roll-up strategy.
• Certainty of funds. A good lender will work with you at the outset to create a framework for qualifying acquisitions ensuring certainty of funds, allowing you to focus on execution.