European Unicorns – Could they shape the world of tomorrow?

As of end of Q2 2024, UBS PitchBook data suggests that there were over 1,400 unicorns
globally. Just over half of global unicorns are US-based, with Europe (on par with
China) home to 14% of unicorns. Within Europe, most are domiciled in the UK (30+),
followed by France (20) and Germany (18). In terms of sector representation, fintech and
software account for over half of European unicorns. It is worth noting that the UK is the
second-highest-funded tech (including fintech) start-up ecosystem as of H1 2024
globally, with funding to the tune of over USD 6 billion in H1 2024. This segment saw over 10
funding rounds totalling over USD 100 million H1 2024.

We believe a holistic appreciation of an industry’s competitive landscape, encompassing listed as well as unlisted companies, is paramount for investors. UBS Research continues to monitor the constantly changing industry dynamics caused by privately owned companies, which can often pose a competitive challenge to listed incumbents. To date, UBS Research has published profiles of 250+ private companies in EMEA that are influencing the industries of the 700+ listed companies in the region that we cover.

We discuss how AI is magnifying the competitive advantage of unicorns, the outlook for private money managers and what private deal activity means for public market investors.

We dissect these unicorns into two broad categories: the tech accelerators and the digital disruptors. The former are technology start-ups operating mainly in the payments, cloud services, cybersecurity and AI segments. These are pivotal to enabling digital innovation across a range of industries. Digital disruptors, on the other hand, harness the technologies to invent new products and create new markets while embracing new operating models, with the potential to pose a competitive threat to incumbent (listed) companies. Our European universe consists of 55% tech accelerators and 45% digital disruptors.

Generative AI is likely the most significant disruptor we have seen in decades, often compared to the internet boom or the industrial revolution. The ability of digital disruptors to effectively harness the benefits of GenAI to their competitive advantage will likely be influenced by the speed of adoption. The faster adopters may be able to establish a more competitive business model sooner and cement themselves as new market leaders in their respective industries. That said, the theoretical advantage could be capped by the risk of increased commoditisation of GenAI solutions, which will likely become more accessible and more adaptable for large-scale use across industries.

Start-ups globally have seen a reset in their implied valuations in the past two years. Higher interest rates have meant higher borrowing costs, diluting potential returns, but despite this backdrop, in the past 12 months European start-ups have raised c USD 11 billion. It is too early to tell whether this reflects a trough in the funding cycle, but at a minimum we view it as a signal that the funding market is open to high-quality digital disruptors. We also observe an appreciation in the valuation of unicorns across regions so far this year, with Europe up 15%, according to the Morningstar PitchBook European Unicorn GR USD index.

As the interest rate cycle has peaked, caution on the sector has shifted to optimism. Our diversified financials analysts argue that, while deal and exit activity have slowed in recent years, some market participants expect to see the bulk of recovery in 2025. Historically, the importance of IPOs for private equity exits has been relatively low, with the majority of exits being strategic M&A, followed by buyouts and secondary buyouts. As fund sizes and portfolio company investment valuations have grown with the industry, our analysts believe that more exits may look to follow the IPO and secondaries routes.