What drives the consistent outperformance of the European mid-market buyout segment?

Sophisticated investors are increasingly drawn to the European mid-market buyout segment due to its compelling long-term return dynamics, which is world-class on all relevant metrics. While many of the factors driving this success are embedded in the European economic ecosystem, some recent factors suggest an even greater tailwind for continued outperformance.

Financially overperforming

Invest Europe’s 2024 Performance Benchmark Report analyses the strong performance of European buyouts, and the mid-market segment in particular.

The European mid-sized buyout segment’s pooled net IRR (since-inception to December 2024) of 17.1%:

• was higher than the European large/mega and small buyout segments (14.5% and 13.6% respectively);

• was higher than North American and Rest of World buyouts (13.4% and 11.0% respectively); and

• had outperformed the MSCI Europe and S&P 500 mPME returns (9.9% and 6.6% respectively).

Of increasing importance to investors in recent years, the European mid-sized buyout segment also showed impressive cash return dynamics, with an average time to liquidity (i.e. to return investor capital) of 3.76 years. This compares with 3.83 years for the European large/mega buyout segment and 4.24 years for the small buyout segment, respectively, and 4.77 years for North American buyouts.

The European mid-market’s edge: local and sector expertise

Patria has been an important investor in the European ecosystem for over 25 years. Since the global financial crisis,, we have seen GPs increasingly focus on genuine sector specialisation, arguably importing an investment strategy that has long been prevalent in the more mature and homogeneous US private equity market. Much of this sector’s specialisation translates not only on a cross-border basis within Europe, but also increasingly on a global scale.

Although local knowledge and cultural affinity are still important factors in  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 an on-the-ground presence with:

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 (or closely affiliated) operatives adding real value to the business, relevant for that sector. Examples include strategic positioning, HR/people support, operational improvements, buy-and-build assistance, and digital transformation.

Europe’s favourable dynamics

We continue to see strong private equity (PE) fundamentals in the US, but certain embedded factors and changes in dynamics of European PE are noteworthy:

• Favourable macro environment: Europe has a lower interest rate outlook than the US, and real GDP growth being forecast to accelerate

• Faster PE recovery in deals and exits: Europe saw the biggest bounce in buyout and exit deal value in 2024 compared to 2023

• Less competition and lower valuations: Europe has around 35% of dry powder compared to the US, with buyout multiples consistently lower.

• Strong ESG regulation:  around 90% of European PE deals integrate ESG, compared to less than 60% in the US.

• Lower return volatility and lower correlation to public market performance.

We expect these dynamics to underpin the impressive performance of the European mid-market for the foreseeable future. It’s no surprise that global investors are increasingly favouring a greater exposure to such an attractive PE segment.

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