Despite the current headwinds facing companies across the region, the European mid-market segment provides a rich seedbed for building regional and global champions. Eurazeo’s selective, well-proven buyout strategy can reveal hidden treasures across the region, justifying a call on institutional investors to think their asset allocation, notably in the pan-European private equity sector. Christophe Bavière explains how Eurazeo’s four-part strategy helps Europe’s SMEs realize their ambitions.
Unlocking the potential of Europe’s mid-market
As investors everywhere confront the profound paradigm shift posed by the multi-facetted crisis we all face today, there is a strong argument for reassessing the potential of the European private equity market.
My aim here is to persuade you that there are real opportunities in the region, especially today, and that Eurazeo’s pan-European mid-market strategy is the best route to realize that value.
First let me acknowledge the justified wariness of the investors themselves.
Of course, there’s nothing new about investors being under-weighted in Europe. In fact, in my thirty years of investing, I haven’t yet met an international institutional investor who isn’t under-allocated to European private equity. Today that is truer than ever.
On the one hand, the European investors with whom we work are facing a unique challenge, as they see their large fixed-income portfolios getting hammered, causing a profound rethink of their approach to risk and the need for liquidity.
At the same time, our international investors, watching Europe from afar, are understandably alarmed to see war on our borders, a conflict that itself is precipitating an alarming energy crisis across the region.
As a result, we see them pulling back from Europe to refocus their portfolios locally. The effect is spectacular. Speaking to one of our international investors recently, for example, I was surprised to learn that they now have a mere 11% exposure to Europe, even though the size of the European economy would justify an allocation closer to 25%.
The same phenomenon of under-allocation is even more pronounced if you look at private equity, itself reckoned by most academic researchers to justify a 25% allocation in any long-term investment portfolio. Even though this is now a mature asset class in Europe, probably accounting for about one third of the global PE sector, we again witness a unique and, to me, incredible under-weighting by investors everywhere.
Leveraging the complex patchwork that is Europe
Why should they reconsider? Put simply, Europe is a rich source of entrepreneurs, providing the best of private equity opportunities for investors.
Of course, you will hear some investors argue that the region is a complex and even bewildering patchwork of people, languages, cultures, governments, regulators, and economic systems. I accept that such a patchwork creates some inefficiencies, but as we have found over the last decades at Eurazeo, it’s precisely by adopting a pan-European approach to the region that investors can actually benefit from these inefficiencies. There are many hidden champions to be found in Europe, not just in the large economies like Germany and France, but across the region. In French we call these promising small companies “pépites” or “nuggets”, sources of great potential wealth tucked away in sometimes unlikely spots.
Our job as private equity investors is help these small companies– be they start-ups, young growth companies, or modest family-owned businesses – to realize their potential by building them up to regional and then international scale.
Four steps to creating new champions
At Eurazeo, our investment strategy unfolds in four stages.
The first is to screen for the best entrepreneurs wherever they may be, looking well beyond the obvious centers such as Berlin, Munich or Paris. Indeed, we don’t mind where the starting point is for a regional corporate adventure. More important than origin is the ambition.
The second stage of the strategy is to help those companies in which we invest to consolidate their markets, first at home, then across the region, and then internationally. Often this is a classic buy-&-build approach, drawing on our European and worldwide network to identify the best candidates for such expansion, stretching our entrepreneurs beyond their relatively small home markets.
While supporting this growth strategy, we simultaneously work to implement a transformation of the companies themselves. Entrepreneurs are not just looking for money. They can still find that quite easily. What is equally important for them is to have the active support and know-how of an experienced investor to help accelerate their digitalization and to integrate the ESG criteria essential to ensure the long-term sustainability of any business. Each one of these steps is imperative to achieve the growth we require of our portfolio companies. Our avowed goal is to build them up as well-structured, well-managed ambitious mid-market players, attractive to other larger investors looking to take them on to the next stage of their growth.
Our key to achieving this lies in Eurazeo’s positioning as a truly pan-European midmarket player. I accept that we are not unique in this category, but I can safely say there are very few other firms that can claim to cover the entire region as comprehensively as we do. So why is this regional positioning so important?
Firstly, the best European entrepreneurs are today as selective in choosing their investment partners as the investors themselves are in choosing their portfolio companies. Being able to show an entrepreneur that you as an investor have a truly European DNA makes you more credible in their eyes.
This is especially true today. Entrepreneurs have seen that when the going gets tough, like now, many international investors are pulling back from the region to focus on their own markets. As a result, the entrepreneurs need to be reassured that their PE backer will stay the course with them.
There is of course a healthy community of smaller local PE investors in Europe too, each one focusing on its home market of, for example, Germany or France or Italy. Again, we find that the entrepreneurs in whom we want to invest have understood the need to expand abroad and to decorrelate the risks inherent in being too exposed to a single country. Working with a purely local PE fund would not help to achieve that. Again, the pan-European positioning we offer is precisely what they need to unearth the opportunities in other countries. Looking ahead into 2023, we all know that it’s certainly going to be difficult for everyone. But having learned the lessons of 2008, when many of our peers abandoned the field, leaving us to gain market share in all our asset classes, we understand that private equity is not a “stop-&-go” market that you can time. With so many rich opportunities to realize across Europe going forward, we will certainly be selective, but we will be there.