The structural advantages of the European mid-market

As long-term investors in private equity, Skandia has historically allocated much of its PE capital locally, with early commitments to several Nordic-based GPs, where Skandia played a pioneering role either as founding partners or Fund I investors. The private equity program was initially focused on the Nordic mid-market and over time, the strategy expanded to include the broader European mid-market.

This segment has proven to be a strong contributor to long-term performance for our beneficiaries. For the past 20 years, Skandia has been actively investing in both Europe and North America, building a diversified EUR 6bn buyout portfolio where the core of the portfolio is in the mid-market segment.

According to Invest Europe, European mid-market managers invested €202 billion in over 4,100 companies between 2020–2024. Over the same period, mid-market funds raised €198 billion, nearly one-third from long-term non-European investors. Mid-market funds managed about €365 billion of capital in 2024.

European mid-market funds delivered a net IRR of about 17% since inception and until 2024 according to data from Invest Europe. Mid-market funds generated a TVPI of 1.81x, meaning investors’ portfolios were worth 1.81x times the capital they put in, with the mPME suggesting mid-market funds outperformed the public benchmark by 990 basis points.

In my view, four structural factors explain this robust performance:

1. Fragmentation
   Europe’s diverse economic landscape across geographies and industries creates a rich pipeline of small- and mid-sized companies, many of which are family-owned or founder-led. This fragmentation offers attractive entry valuations and compelling investment opportunities.

2. Value creation potential
   Mid-market companies often present significant opportunities for operational improvement. Experienced GPs can drive transformation by professionalising operations, digitalising processes, expanding internationally, and strengthening leadership teams. Compared to larger, more optimised businesses, the scope for value creation is substantial.

3. Moderate use of leverage
   Mid-market deals typically involve lower levels of debt than large-cap transactions. This reduces downside risk and ensures that returns are primarily driven by strategic and operational improvements rather than financial engineering.

4. Flexible exit options
   Mid-market assets benefit from a wide range of potential buyers, including large-cap GPs with ample dry powder, strategic acquirers, and public markets. This flexibility enhances the likelihood of achieving favorable timing and valuations at exit.

These characteristics align well with our long-term investment philosophy. We prioritise backing teams with repeatable value creation strategies and avoid approaches overly reliant on leverage. Liquidity is also key, and in recent years, when distributions have been scarce, mid-market exits have been instrumental in keeping our portfolio cash flow positive.

Looking ahead

As Europe faces macroeconomic headwinds, investors are gravitating toward strategies with a proven ability to deliver through cycles. The mid-market’s focus on hands-on ownership, operational enhancement, and moderate financing remains compelling, and we continue to allocate capital to the segment.

However, one concern is the growing inventory of mid-market companies currently held by private equity. Many of these assets are approaching, or have surpassed, their optimal holding period. While large-cap and strategic buyers can absorb a portion, it remains to be seen whether the market can accommodate the full volume.

Conclusion

The data underscores that European mid-market private equity remains a cornerstone for long-term institutional portfolios. Its consistent outperformance versus public markets highlights the strength of the active ownership model and the ability of skilled managers to transform businesses. We believe this model will continue to thrive.

Sofie Kulp-Tåg, Ph.D.
Senior Investment Manager - Private Equity
Skandia Mutual Life Insurance Company
Member, LP Council, Invest Europe