Market Consolidation and the Road to IPO | EBC12

Hello everyone. Perhaps we should start with a brief introduction of each of us and what we do. Jean-Malo, you can start, and we'll continue in turn . Yes, of course. Greetings to everyone.

Jean-Malo Dupont, I am a Managing Director at KBW and am responsible for the digital assets area in Europe. KBW assets area in Europe. KBW is an investment bank specializing in financial services. Essentially, we are a bank for banks, based in the US. We deal with mergers and acquisitions, capital raising and IPOs for banks and financial institutions, and 10 years ago we had to support clients in implementing blockchain technologies to optimize their business models.

We learned a lot and now have a dedicated team in Europe and the US supporting our customers. We see blockchain as a tool for the development of the financial industry in all segments: infrastructure, asset management, payments, and trade. Therefore, we advise our clients in both development and capital markets. Hello everyone, nice to be here. I am Guillaume Vitrish, I am a lawyer, but I will be concise in my presentation.

I am a partner at White&Case, a global law firm, and specialize in M&A and private equity in technology companies, especially those working with digital assets. We cover everything from seed funding rounds to IPOs, including, of course, M&A deals, which we are excited to discuss today. Hello everyone, my name is Jan-Philip Krahn. I am one of the co-founders of Arete. We are an investment We are an investment banking firm that deals exclusively with digital assets, blockchain, and cryptocurrencies.

We have been in business for about 5 years and have closed over 30 M&A deals on the sell-side, buy-side and with equity tokens, spread across sectors in this industry sectors in this industry . We cover everything from trading infrastructure, staking and infrastructure solutions to tokenization, payments and any new categories. And I'm Victor Teixeira. I'm with General Tenser. I'm the CIO there.

We build and operate a number of validators and data centers. We focus primarily on the BitTensor ecosystem, but we are expanding further. We have also completed a number of M&A deals in this area. In a past life, I was also a banker. So there 's probably some coincidence here.

But maybe before we get to the point, I think it would be very helpful to discuss market consolidation, especially in the crypto space. I think it's very focused on the US. So, I would really like us to focus our discussion on Europe today. Maybe Jan Philippe, you could give a general overview of what you are currently seeing in the market from Arete's side. Especially regarding the European market.

Yes, of course. I think, primarily in the area of mergers and acquisitions, cryptoassets and digital assets have become a really hot topic over the last year. Since then, we have seen significant consolidation in the industry: from small acquisitions to hire talent to billion-dollar deals, IPOs, SPACs, and the activation of treasuries in digital assets. So I think we have a really active mergers and acquisitions market in this industry. And the good news is that even in this year, which many consider to be a “bearish” one for the industry, this market remains very active.

The pace of dealmaking may have slowed somewhat, but judging by the volume and number of deals, the industry is clearly experiencing a wave of consolidation, with new players joining: financial institutions and traditional software companies seeking to expand through acquisitions. Similarly, from an IPO perspective, we saw a lot of high-profile placements last year. This year the numbers are down a bit , but I'm sure many companies have simply postponed their IPOs and will go public within the next few years. Answering your last question about Europe, I think we are seeing a lot of deals in our region deals in our region . Many great companies are being created here , which are now either buying others or becoming targets of acquisitions themselves.

If you look at the IPO market, there is a clear trend towards listing in the US. The number of truly large IPOs in the cryptocurrency world is still limited, but most large European companies are also looking to list there. Therefore, the number of listings in Europe itself is very small. Yes, and in that context, I would be interested to know...where do you think there are opportunities to unlock this additional liquidity?

Europe has traditionally been a less liquid market in general, not just in the cryptosphere not just in the cryptosphere , but given crypto assets, what can be done to unlock it and find a place for the European IPO market? It seems to me that the European IPO market still remains limited in terms of investment demand. It is fragmented. So, to find a significant pool of investors, you need to go to every country, every place where there are investors, and you get a smaller amount of capital that you need to pool. So, from a work perspective, it's much more difficult and it takes more effort than, obviously, in the US.

Um, that's why companies are trying to enter the US market because they get a huge amount of capital from day one, and that's an order of magnitude or two more for any crypto business. If you are not very, very, very visible in a particular country, then you can choose a local fundraising strategy . But it won't be a significant, substantial amount of capital. And so, for now, I think we still have a little bit of work to do. Um, and to support the growth of our European companies before going public, there are several solid companies that are already ready for the market.

The window of opportunity is almost closed this year due to the reallocation of capital to other technology or AI technology or AI businesses, as well as partially in the US. So let's consolidate first, and then, um, we can go for an IPO. As for whether M&A drives IPOs or IPOs drive M&A, going back to what you said, JP, there was a very large series of IPOs in the US last year. They raised about 15 billion, and these companies have received a lot of capital thanks to a history of equity that drives organic growth and an M&A development plan. So, this capital is now being directed towards M&A deals.

Thus, this IPO stimulates M Thus, this IPO stimulates M &A. And it's not, um, and this capital is not just going to the US. It is largely directed towards both Europe and the APAC region. And, um, you have this example: Bullish buys CoinDesk for 4 billion. Um, you have big acquisitions, too, for example, eToro, and then companies in Israel.

Um, in Singapore too. So Singapore too. So , the pool of capital raised in the US is directed around the world, to all companies. Um, and that's fueling this M&A sector, while the IPO market is n't very active right now. And of course, there's one of those options that I think always works one way or another.

And I believe that when capital leaves a sector, that sector really needs to consolidate. And on the issue of consolidation, I think we are seeing a significant increase in it in Europe as a whole. I think one of the challenges we face in Europe is the fact that it's 27-28 different geographical areas with different jurisdictions and so on. So, Guillaume, I would like to ask you would like to ask you : from a regulatory and legal perspective, where do you see the challenges and where do you see the challenges and where do you see the opportunities in the European market regarding these consolidations? Well , that's a good question.

It directly addresses what Jean-Michel was talking about regarding fragmentation and the need for consolidation to go IPO. And I think the go IPO. And I think the key driver this year, which we are already seeing in the market, and from which I expect a lot of transactions, is the regulatory factor. Namely, since July 1, national rules are no longer in effect, and the MiCA regulations have come into full force. This means that the MiCA license provides completely different conditions and access to a single "passport" to work throughout Europe.

So this will probably help reach a larger market and facilitate IPOs, but it will also significantly change the M&A market. Some of the mergers and acquisitions will be driven by this regulatory need. Some companies will find companies will find that if they want to scale quickly enough, they may not want to implement the necessary processes, or be unable to recruit the expertise or allocate the management time required to obtain a MiCA-level license. So, maybe it's MiCA-level license. So, maybe it's time to go to the market.

On the other hand, for those companies that already have this license, they become much more attractive buyers on the market. So, this will have an effect on both sellers and buyers, and will also affect investment theses. So I really think that's going to be a key factor in the coming months and probably years, and hopefully it will simplify how investors and analysts, when we talk about IPOs, perceive the market. I think that's a great comment. And I think the other part is, of course, again, that a lot of these things are cyclical.

We are probably in the first "bull" market. We are heading, hopefully, towards the first crypto market to trend upward under non-zero interest rates. So, I think it's going to be quite a different view that we're going to see from a capital allocator perspective. I think, Yann Philippe, most of the recent deals we've seen have been more strategic, and as Guillaume said, businesses have to scale through acquisitions. Where can we attract more financial sponsors financial sponsors ?

Because I think that at a certain point, financial sponsors allow for more scaling than strategic ones. So I'm interested in hearing your thoughts on this. Yes, that's a good question that I think all of us in investment investment banking have been waiting for for a long time. My work experience is work experience is actually in the private equity sector. I started my career at Blackstone, so when we started this business, we knew it would take time for the industry to mature for large buyouts.

And of course, it is difficult for financial backers to understand crypto-native business models at the initial stage; there are regulatory barriers. Many of these businesses are very volume-dependent compared to the traditional SaaS traditional SaaS models with recurring revenue that they like to invest in in the software space. So it took time. Last year, we advised financial backer Bridgepoint on the first major buyout of HC Digital HC Digital , a crypto accounting company. This is another good example of financial sponsors starting to pay attention to this industry.

Of course, this is to some extent a traditional service business model serving this industry. So this is an easy entry point for a financial sponsor financial sponsor , a business they understand well and may have already invested in something similar. I think we will see more of these deals where financial backers will buy service companies or SaaS models in the crypto space before diving deeper. But the reality is that in an industry where so much is tied to trade and volume, these are not exactly typical business models for private equity in the traditional world. I think this is an interesting question, especially regarding sectors.

We see payments and tokenization as a growing sector that has real practical applications. I think, in your opinion, SaaS and service providers service providers are likely easier options from a financial sponsor's perspective. I guess in the European context, where we see—and maybe Jean-Michel, this is a question for you—where do you see opportunities in terms of consolidation and the path to IPO for these kinds of companies in the payments and tokenization space? Um, yes, we see that these two segments are somewhat independent of BTC price fluctuations. So BTC price fluctuations.

So , companies are building payment rails, and these are long-term trends long-term trends . We see everyone actively participating in these two areas in these two areas —tokenization and payments. We still see activity in trading, market trading, market making, and among players who contribute to both infrastructure and trading volumes. So there is still a demand for it. But he is clearly becoming more strategic.

We see that companies need to diversify their business models. If it's a payment model, they're trying to move away from just payment services and increase volume. And if you are volume-oriented, you need to move into a more stable infrastructure business. So I would say that it is infrastructure and business model diversification that is one of the drivers of the M&A story in Europe. Because you need to be able to navigate through cycles and benefit from all business models.

If you want to go public, you have to be diversified. So now, volume-based businesses have accumulated a lot of capital and are looking to direct it into less volatile areas. This will be relevant this year, but yes, things change quickly. So that's interesting. This is very interesting.

I think this brings us to an interesting point, especially when companies have several different risk profiles within their operations. Deal structuring becomes very important, and I believe that isolating these elements from each other is necessary so that risk from one direction does not lead to collapse in another. Maybe what you've seen in this area recently in Europe in terms of structuring deals to really isolate these risks? Yes, I'll just add to what we discussed, and then I'll respond to the structure of the deals. One thing that's interesting to see across all sectors, and it echoes what you're saying, JP: if you want to move to a model where buyouts by sponsors or large LBOs are possible, the company needs to scale quickly.

The reason is that some of them find themselves in the so- called “valuation trap”, moving from a world where from a world where revenue and growth are the main thing, to a model where valuation is based on EBITDA multiples EBITDA multiples . This transition is very complex, and to meet the criteria for a sponsor buyout, you need to work within the realities of EBITDA multiples EBITDA multiples . If I'm not mistaken, this will also be a driver for consolidation, to join forces. To answer your question, we are seeing more and more complex structured M&A deals that combine shares, cash, and sometimes tokens. The difficulty lies in combining two branched capital tables with different levels of profit sharing, liquidation benefits, etc.

This is a real challenge— real challenge— to align the interests of all investors, both the buyer and the target company. Where will they be in the queue for payments from the buyer? Will they receive common stock? Will they be at the front of the queue for payments? This is something we spend a lot of time on, structuring the deal with bankers in the early stages.

This may cause some irritation. But it is very important for the company to take this into account. When you raise equity, you always have to think about how to untangle it if you go out into the market and buy someone out a few months after that funding round. This is a key factor in modern transactions modern transactions . Yes, I agree, and until banks start conducting purely cash transactions, which is happening, we will see most such transactions only with stocks.

That's why there is interest and a request from some target companies to find American companies that already have stock listings. So you get liquidity and shares, but already liquid shares. And maybe one last question, just to move on. I think we had a very interesting discussion, especially on the role of development, and you made a good point about the valuation of the transition from revenue to EBITDA. Where do you think the greatest opportunities for founders to unlock growth potential after reaching a stable level?

How do they get to the point where they can overcome this valuation trap ? I would return to the issue of business diversification. We see that recurring income takes longer to build, provides better visibility, and is often more profitable. Or you can achieve high margins through optimization. This is what private equity firms like.

But if you're looking for explosive growth explosive growth , a volume-based business can get you to EBITDA or a healthy EBITDA level faster. Guillaume. Or JP? No, I meant in general, I don't know, otherwise I would be a founder, not a lawyer, to be honest lawyer, to be honest . Yes, I think the diversification thesis is very valid, especially in this industry, where we see many companies that historically, in previous cycles, could grow 100 times during a times during a bull market, but then lost 99% of their then lost 99% of their revenue and profitability in a profitability in a bear market, so many founders are moving away from models based solely on volume whenever possible.

Of course, this is only possible after reaching a certain scale. If you have a small team of five to ten people, you can't do many things, and product launches are notoriously time-consuming notoriously time-consuming . Also, I think one of the common pitfalls that you mentioned, Guillaume, is raising capital and structuring your capital table. We have a lot of companies from the past in this industry that have raised funds through token rounds and equity rounds at one time , and we have always seen an easier path to exit when the capital table is clean, without a large number of token holders and shareholders with different types of instruments, so I think it is important to monitor the capital table and fundraising rounds when preparing for an exit. Yes, and the secondary market is also quite actively helping to clean up the capital table.

This is also something we've been working on a lot—secondary transactions not just before the IPO, but generally to clean up the capital table and capital structure. So, that's something to look out for next year, I think. You are incredible. Well, I remember the time. Thank you sincerely for your time.

I think it was a great panel discussion. Thank you. Thank you. Thank you all.