Europe’s Mid-Market on the March

In the fast-paced arena of private equity, Europe’s Mid-Market has emerged as the unsung hero. Over the last 15 years, this segment has become a beacon of success for investors and a catalyst for growth in the European economy.

Financially overperforming

Invest Europe’s research paints a compelling picture of the Mid-Market's financial performance. With a median IRR¹ of 16.6%, the European mid-sized buyout segment:

• was higher than the European large/mega and small buyout segments (15.1% and 13.2% respectively),

• was higher than the North American and Rest of World buyout markets (13.4% and 11.2% respectively), and

• had outperformed the MSCI Europe Public Market Equivalent by 9.7% pa.

The Mid-Market isn't just holding its own; it's leading the way.

A job creation powerhouse

Beyond the balance sheets, the Mid-Market appears to be a job creation powerhouse. Invest Europe’s research shows that in 2021 approximately 4,000 PE-backed portfolio companies in this segment employed 3.7 million people, with a net creation of over 116,880 new jobs in two years. These companies had a job creation rate of 6.9% - far exceeding the 1.2% for all European businesses.

It was notable that there was a significantly higher weighting of employment in the high-growth Healthcare and Technology sectors in the Mid-Market versus that in Europe as a whole.

The Mid-Market’s secret: local and sector expertise

What has driven this outstanding performance and why should we be confident that this may persist?

The abrdn Private Equity business has been an important investor in the European ecosystem for over 25 years. Post GFC, we have seen GPs increasingly focus on genuine sector specialisation – arguably importing an investment strategy long-prevalent in the more mature and heterogeneous US private equity market. Much of this sector specialisation is being replicated not only translates on a cross-border basis within Europe, but increasingly on a global scale.

Whilst local presence and cultural affinity remain important aspects of a GP’s ‘reason to win’ with management teams and vendors in Europe’s many diverse markets, we find that the best-in-class Mid-Market managers combine local and sector expertise to become formidable investors in their chosen fields.

This sector and thematic expertise go well beyond knowing a specific sector or sub-sector really well. Mid-Market managers are now using the large/mega-cap GPs playbook and investing management fees in their infrastructure and capabilities to add genuine value to the businesses they back.

Winning strategies

We find that the best Mid-Market private equity managers now demonstrate a combination of:

• Deep domain knowledge: long-standing sectoral expertise, repetitive investment strategies, a strong sourcing engine and pattern recognition create opportunities and avoid pitfalls that sector non-experts may miss. This expertise also means that the GP is better positioned to determine the optimal exit route and timing.

• Strategic and operational expertise: in-house (and/or closely affiliated) operatives adding real value to the business that are most applicable to that sector. Examples include strategic positioning, HR/people support, operational improvements, buy-and-build support, and digital transformation.

With sector specialists, we see increased evidence of:

• more ‘winners’ and less impairment – clear evidence of the above “toolkit” at work,

• higher levels of growth, organic and acquisitive, within existing markets and cross-border/global,

• the GP’s ability to invest across a broader size range (in some cases through separate, dedicated funds) as the strategic expertise expands, and

• our ability to construct portfolios for our mandates and clients on a sectoral rather than geographic basis.

We expect to see good managers to continue to improve their capabilities within their chosen specialisations, as well as a broadening and deepening of the European sector specialisations available to institutional investors. As such, we believe that the fundamental drivers underpinning the strong performance of the European Mid-Market for investors, which correlates with the societal and economic benefits of its higher growth and employment, are likely to continue.

Merrick McKay
Head of Private Equity
Patria Global Private Market Solutions
Member, Invest Europe, LP Council 

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1 – Since inception, vintage years 1987 to 2022.