Europe is home to some of the most prolific family-owned businesses in the world. With legacies spanning decades, if not centuries, these businesses have survived wars, economic recessions and plagues.
With the changing socio-economic situation, most of the larger companies have either taken on external investment or listed on public markets. However, a majority of family-owned businesses, and indeed a majority of all businesses in Europe are SMEs — the Mittelstand. These are often too small for traditional PE funds and for public listings, and too large and traditional for venture capital.
Consequently, this space has lower institutional competition and most of these deals are the domain of search entrepreneurs, MBOs and other family investment firms looking for strategic investments.
With ageing demographics, new market opportunities and technological changes, we see a significant opportunity for investors and entrepreneurs to participate in the growth of this, low competition, high potential segment of businesses in Europe.
Sweet spot: low competition, more opportunities
Stage:
Traditional PE players (Bain, EQT, PAI etc.) and Corporates (Nestle, Danone, Givaudan, P&G etc.) have all been very active players in the market for spin-outs and buyout opportunities within FMCG in general and in Europe in particular. Given their fund and strategic requirements, they typically target larger (€50m+) opportunities within tightly defined strategic mandates. These are competitive deals and demand much higher EBITDA multiples than smaller buyout investments.
Strategic and private equity deals with an enterprise value below $100M were fetching a median multiple of 6.6x EBITDA. In contrast, deals valued between $100M and $500M, were valued at approximately 9.7x EBITDA. [3]
EV/EBITDA in the consumer goods & FMCG sector in Europe 2019-2020, by industry [2]
At the other end of the spectrum, most VC funds, Angel syndicates and family offices are active in earlier stages of investment but tend to focus on, tech-heavy, high risk-reward targets, typically less than €5m in revenues. These fit their exit horizons better (8-12 year fund life) and are primarily financial “long tail VC” investments. VC investments in tech-driven companies typically demand 10X+ revenue multiples, presumable, factoring in the future growth potential of the company.
Within the €5-€50m space, the competition is limited, EBITDA multiples are lower (between 2-5X), active government support available and local bank leverage accessible. All this can help magnify long term returns for investors.
There are about 27,000 small-cap investable companies in the UK, 60,000 in Germany and 13,000 such companies in the Benelux region [5]. The number of small-cap buyouts is 15 times the number of deals above €100M threshold and has been consistently the case in the past decade [6].
While larger corporates are also active in buying smaller companies, this is mainly for strategic and supply chain protection reasons and not typically the main focus for them. This also creates an opportunity for us to co-invest with them, further stabilizing cash flows from our portfolio companies.
This creates an opportunity for focussed investors to access low competition, smaller FMCG companies (€5-50m), with stable cash flows, and invest for the long term.
Sector:
A growing, young and affluent middle class in Asia is starting to buy products differently from their parents’ generation. While local products exist, and are growing in popularity and market share, a large market exists for high-quality western products, specifically from Europe at the higher end of the market.
Euromonitor International: I am willing to pay more for a product that is ___?
These brands, especially ones with sustainability credentials, have greater traction with the increasingly affluent millennial consumers in Asia as in Europe.
European brands command the greatest recognition and are most strongly desired by Asian consumers [5]. These are products that have brand recall and an association with luxury, high quality and dependability.
As with larger US and European FMCG brands, niche brands with history and a story have significant potential in Asian consumer markets. Using focussed digital engagement and e-commerce supply chains, we believe there is an opportunity to gain traction for these products in Asia where young consumers are digital natives and looking for authentic products to associate with.
Digital Natives are increasingly dominant in the workforce [8]
These companies could also benefit from a “rising tide” of the billions of dollars larger MNCs have invested in building supply chains and familiarity with western products in Asian markets.
European FMCG SMEs can harness various digital tools and platforms (Instagram, Youtube etc., AWS, PayPal etc.) and established supply chain systems (Alibaba, Amazon etc.), to access similar growth without having to spend on building proprietary infrastructure in new markets like Asia.
Geography:
Western Europe has benefitted from the post-war demographic dividend, new infrastructure, lower cost of capital, industrialization, government support and access to integrated consumer markets — since the EU was formed.
While large conglomerates and national champions dominate the FMCG league tables in Europe, they have spawned a proliferation of small and medium companies, the Mittelstand, clustered around their main production cities. Many of these are high quality, niche producers of essential products and services that are integrated into the value chains of the larger companies. They make up to 50% of all private employment jobs in Europe. [7]
As the larger companies have expanded abroad, they have taken these SMEs, or more often, their products with them. This has helped the SMEs increase their revenues, but has also increased their dependence on their larger customers. Few, if any of these SMEs have expanded abroad themselves due to limitations of skills and network.
A majority of enterprises active within the EU are SMEs, of which there are about 23.3 million [8]
Mostly family-owned, these companies are often based in industrial cities or second-tier cities (Milan, Lyon, Halle, Zug etc.) which are not attractive to top tier engineering and business school graduates. As the founding generation retires, it is a challenge to find motivated and entrepreneurial successors to move to these towns and take over the business. This adds to the overall skills and network shortage these companies face in expanding their business into new markets and possibly product categories. This is among the major challenges Mittelstand in Germany and other developed countries face.
Unlike in the US, where local competition is high, or in Japan, where cultural barriers make buyouts very difficult – Western Europe’s low-interest rates, low competition and proliferation of high-quality Mittelstand companies, going through succession issues, creates an opportunity for internationally-minded entrepreneurs to help unlock their potential.
This is the first instalment of our three-part series on family businesses and the opportunity to unlock their potential. To read the first instalment, click here. Next week, we will be discussing the Goldilocks moment for entrepreneurs and investors in family-owned SMEs in Europe.
[1] Murray Devine 3Q18 Valuation Report (2018)
[2] Statistica 2020
[3] Eurostat 2017
[4] Small is Beautiful Kempen 2019
[5] Mckinsey & Company China Luxury Report (2019)
[6] PWC Innovation Reports, 2018 - (Digital Trends)
[7] Overview of Family Business Relevant Issues’ Kmu Forschung Austria Report (January 2009), Statistical Pilot Project on Family Businesses from the EC (2016) and individual statistical offices from different Member States.
[8] Small is Beautiful Kempen 2019
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