Luxembourg: Too Many Fish In The Mid-Market Pond?

Ah, the mid-market. A source of pride for generations of entrepreneurial families and founder-managers. The locomotive of the economy, backing and stabilizing growth, fostering innovation, and combining business acumen with generosity for decades and decades. Not headquartered in shiny towers in the middle of metropolises, but instead providing confidence – and employment – for society in rural areas. Every investor's dream, right?

Big is beautiful?

Let's define terms first. If you were to define the mid-market by enterprise value, it would comprise entities/groups with an enterprise value between EUR 50m and 500m, which – in today's environment – may well comprise entities with EBTIDA between EUR 6m and 60m. One might think these are peanuts compared to the mega buyouts that receive the majority of press attention, such as Cinven's and Advent's interest in the Stada group – which is currently said to be valued at EUR 4,800m based on EBITDA of EUR 390m.

All those deals have one thing in common: they are rare – but also complex, and risky. In an environment that is usually summarized with the key term uncertain", LPs might not necessarily be tempted to allocate much of their capital to mega-buyout funds, as the capital that is being deployed right now relates to funds that had been closed before the period of political upheaval we are now seeing in in a number of countries over the world.

"But we have always done it like this?"

Going back to the initial question – what makes the mid-market so attractive?

It's certainly not the romantic view of medium-sized enterprises as the "good side of capitalism" that is sparking investors' interest. Part of the success of the mid-market as a highly sought after segment of the buyout market is its fragmentation, particularly in Europe. Companies might have a great product, a committed leadership, a well-respected brand, and a local footprint. But they may also lack the expertise to access the capital markets, lack strategies to attract and retain talent, and may not necessarily have a strategy to "think outside the box" in order to identify alternative distribution channels, different product pricing strategies, etc. etc.

Lots of opportunities exist for General Partners, or GPs, that have the local expertise, but are well prepared to support enterprises in their internationalization: streamlining processes, increasing operational efficiencies, optimizing the capital structure, and finding further enterprises in order to buy-and-build the business.
It's the ideal playground for any ambitious PE house that wants to demonstrate its unique approach to value creation vis-à-vis its investors – and that's pretty much irrespective of where the headquarters of the potential target are. Certainly, some strategies may work out in Spain that might not work in Hungary, but it is exactly the interrelatedness between all those factors mentioned above which make this market so attractive.

Company for sale, only 20% premium – hurry up, prices are rising!

Too good to be true? Well, there is in fact one caveat: it's not exactly a secret. There's a myriad of GPs out there who claim to be the experts focusing on the "Mittelstand", being a "partner" for entrepreneurs. Why is that?

In short – demographics! With declining birth rates in general, the "pool" for potential successors in family-owned businesses is becoming increasingly limited. In many companies, it's also a possibility that the only son or daughter may not even be interested in taking over the CEO role in the family business ("How dare you!?") So as baby boomers are about to retire, it's only natural that more of them start see Private Equity investors as "partners" rather than "locusts". And even in rather conservative jurisdictions such as the DACH-area, calls from PE houses for initial discussions are now being returned by founder-managers.
The question is, if everyone is looking after the same targets and thus pushing up prices, is there still room for value creation, or are we all about to buy at peak levels, and will we possibly need to take the hit 2 years from now?

See me discussing exactly this on 28 February 2017 at 3pm during the SuperReturn International in Berlin with a panel of seasoned Private Equity professionals. Register now, using our discount code FKR2428EMSPN, which will save you 20%!

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