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What strategy for buy-outs?

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The European buy-out market is currently attractive to international investors, as it has consistently outperformed its US counterpart over the past five and 10 year periods on the back of a fundamental trend towards greater European business integration and the exploitation of market inefficiencies. In Europe, the investment universe represents 200 general partners (GPs), including 20 large/mega players (with the most recent funds well over e1bn), 20 in the upper mid-market (fund size between e500m and e1bn), 60 in the core mid market (fund size between e200m and 500m) and the remaining 100 in the small to lower category (fund size below e200m).

Investors have to choose between large pan European funds and mid-market funds on the one hand and assembling a collection of smaller country specific funds on the other. Going forward, mid-market players among country specific funds seem to have a higher potential for return (measured in terms of cash multiple) than pan European mega funds (which tend to generate healthy IRRs over shorter periods). The mega funds face increasing difficulty in finding attractively priced acquisition targets. Overpaying has become somewhat common in these large buy-out funds with too many managers chasing too few targets. Therefore it makes sense to look for funds focused on mid-market deals in the e10 to e250m ranges, where competition is less fierce, entry prices are more attractive and operational performance as measured in terms of revenues and EBITDA progression is usually much faster.

Depth and attractiveness of the European mid-market
Although in terms of value, large and mega buy-out deals take the lion’s share of investments in Europe, the mid-market segment is by far the deepest in number of completed transactions and reservoir of futures deals. In 2003, according to CMBOR, 406 deals were made in the e5 to e250m enterprise value range while only 54 large and mega deals (above e250m enterprise value) were completed, although in money terms they accounted for two-thirds.

How to build a European buy-out portfolio?
In building a European buy-out portfolio, it makes sense to diversify through a mix of large and mid-market players. The 20 large/mega players are easy to identify and access (although the minimum ticket they require may be a significant hurdle to many investors). Why pay a fee to a gate-keeper and/or adviser to access this asset class? Investors can go directly.
However, the European-market investment universe is wide: deep analysis and research is necessary to identify and access the best in class managers. But, make no mistake: the old stereotype of the mid-market manager never participating in auctions or always paying very low entry multiples is no longer true. The key success factor today consists of a more segmented approach to mid-market opportunities. Investors should look for funds active in the average e10 to e250m company value range (and fund sizes between e100 and e400m).
They should also pay more attention to special situations and sector-focused funds, able to operate in several European markets with buy and build, build-up or roll-out strategies. Here again, mid-market players are best positioned to create value through EBITDA multiple arbitrage (price paid at entry expressed as a multiple of EBITDA versus price at exit), improvement of operational performance of underlying investee companies and financial engineering. For specialised funds, their understanding of a business, their ability to deal with managers/entrepreneurs and their potential added value in that sector are far above their competitors’ level. In addition, secondary buy-outs towards larger funds present favourable exit opportunities.
It takes much more time and effort for investors to read into the mid-market with its myriad of domestic or sector focused funds than it takes to choose between 20 mega funds available on the market. Therefore, the solution for investors is getting more and more straightforward: go direct for the mega funds and use a specialised fund of funds for the small- to mid-market in Europe.

Adding niche funds of funds to your strategy
Funds of funds are well positioned to offer all types of investors a high level screening and selection process leading to better focus, better diversification and better returns with lower risk.
Nevertheless, the European mid-market buy-out is structuring itself in such a way that the ‘best in class’ are having more and more appeal due to their strong track record and have become more and more difficult to access, giving a strong advantage to those investors already in place.
Access Capital Partners, the leading independent European mid-market specialist, with e900m under management, singles itself out as one of the few funds of funds to focus its investment strategy on European small to mid sized funds since its inception in 1999. So far, it has assembled the largest and most homogeneous European mid-market portfolio with 24 mid-market GPs based in eight European countries, with an average fund size of e300m and an average enterprise value below €100m.
For further details please contact
Agnès Nahum, Dominique Peninon or Philippe Poggioli at:
Tel: +33 1 56 43 61 00
E-mail: acp@accesscp.com

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