Philippe Poggioli

The European small-cap buy-out market offers strong opportunities for investors in 2025, according to managing partner at Access Capital Partners, Philippe Poggioli.

“The small buyout space in Europe offers a vast pool of investment opportunities, with around 450 established and emerging fund managers raising funds typically below €500 million.

“This market accounts for approximately 90 per cent of all buy-out deal volume in Europe, allowing us to be highly selective when deploying capital,” says Mr Poggioli.

Opportunities in this space have been mostly in sectors underpinned by major long-term trends such as IT and digitalisation, healthcare, and essential business services, which Mr Poggioli says offer strong resilience and significant growth opportunities.

“An example of a successful investment in our fund portfolio is a Dutch healthcare-focused secure communication software vendor, which through multiple add-on acquisitions, became a pan-European market leader.

“Today, the company is the market leader in electronic administration registration and online healthcare prescription. During the holding period, the fund manager guided the company’s management team in an ambitious growth strategy including an active buy-and-build strategy. The company has grown from €25 million in revenue and €8 million in EBITDA in 2018, to €71 million in revenue and €30 million EBITDA in 2024,” he says.

Mr Poggioli emphasises the resilience of the small-cap buy-out segment as supporting investor returns.

“Unlike larger buy-out transactions, which often involve significant leverage, smaller buy-outs adopt a more conservative approach to deal structuring, often with modest debt packages. This makes financing more accessible, with fewer risks linked to interest-rate fluctuations, enabling fund managers to continue deploying capital when the debt markets are tight and minimise leverage risk.”

Looking ahead, Mr Poggioli remains optimistic about the prospects for small-cap buy-outs in Europe and the potential for outperformance compared to larger buy-outs.

“This outperformance stems from managers’ access to a wider investment opportunity set, lower valuations at entry, more levers for value creation, and potential for higher EBITDA multiple expansion upon exit.

“The exit environment for small-cap buy-outs also remains favourable as they tend to have a wider range of exit options than their larger counterparts.

“Larger buy-out funds have been longstanding buyers of small private equity-owned companies, either as new investments or as add-on acquisitions to existing platforms.

“For instance, in 2024, we exited a UK-based provider of public cloud migration and IT services, generating a 3.5x gross money multiple and returning approximately €32 million. The company grew revenues fivefold, expanding its product and service proposition across the Microsoft stack and successfully completing four add-on acquisitions,” says Mr Poggioli.

However, careful manager selection by investors is required.

“With around 450 managers in the small and mid-cap space, the dispersion of returns is higher than among larger funds. Investors need to apply a disciplined and rigorous due diligence process to generate superior performance,” he says.

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The volume and diversity of renewable energy projects has been growing.

The infrastructure asset class is experiencing tailwinds from secular megatrends including decarbonisation and the energy transition, digitalisation and the growth in data and AI, with the energy and utilities sector alone requiring an estimated €1 to €4 trillion of infrastructure spending by 2030 to achieve a commitment to carbon neutrality by 2050.

The European market remains at the forefront of these megatrends, as the home to leading infrastructure corporate groups, such as Veolia, Vinci, Hochtief, Ferrovial according to fund manager, Access Capital Partners.

This market remains the largest globally by annual number of transactions, with mature regulatory and legal frameworks, with a strong mid-market opportunity, says Tomas Wegelius, partner infrastructure at Access Capital Partners.

“The market remains a healthy ecosystem, with around 150+ established general partners (GPs), alongside the emergence of smaller, newer, GPs each year with more specialised, niche strategies.”

Additionally, he says, the European infrastructure market is considered the most active and diversified infrastructure market globally.

“Comprising of over 30 countries with different infrastructure frameworks and different investment needs across key sectors such as fibre networks, road networks, waste and water solutions, Europe provides a very large mid-market opportunity, with market fragmentation creating compelling consolidation opportunities.

“The European market benefits from mature regulatory and contractual frameworks, with the increasing integration of the EU market and reduction of unjustified monopolies.

“Currently, the market is witnessing strong growth, from both the requirement to upgrade existing systems, and the development of new projects, with high public deficits creating a need for more private financing of infrastructure assets,” he says.

Secular megatrends are also providing huge investment opportunities.

“The digital infrastructure sector has witnessed rapidly increasing demand for bandwidth and telecommunications, 5G and fibre network deployment and data centres, in recent years. In 2024 alone, the world is expected to have generated 1.5 times the amount of digital data it did just two years ago, and this strong growth trend is expected to continue, underpinning demand for digital assets.

“In the energy and utilities sector, both the volume and diversity of renewable energy projects has been growing, with increased focus on flexible solutions such as battery energy storage. Given the decarbonisation commitments of both governments and businesses we foresee investment opportunities in this sector to remain attractive for the long-term.

“The transport and mobility sector has undertaken a major transformation due to increased urbanisation and the focus on flexible, green solutions. New mobility subsectors have emerged to support this transition, such as electric vehicles and charging networks, which in turn will require upgrades to grids and electricity distribution networks. Whilst the sector has traditionally focussed on assets such as toll roads, airports and ports, the shift to clean mobility will be a key focus of the coming years, creating significant new opportunities in the sector,” he says.

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Private equity funds focused on buying smaller companies typically outperform funds buying larger companies, with more attractive investment opportunities and lower buy in prices available in the small to mid-cap universe, according to analysis from fund manager Access Capital Partners.

Philippe Poggioli, managing partner with Access Capital Partners, said “smaller buyout funds offer potentially greater upside to investors compared to larger funds. This outperformance is the result of small-cap fund managers’ access to more investment opportunities, lower valuations at entry, more opportunities for value creation, and the potential for greater earnings expansion upon a sale”.

“Historically, small and mid-market companies have presented lower entry multiples for buyers. According to statistics from Access Capital Partners, S&P, Unquote, Epsilon Mid-Market Index and Clearwater International as of June 2021, the average multiple paid for companies with an enterprise value (EV) of less than €250 million has come c. 20 per cent lower than entry earnings multiples for larger businesses (typically above €250m EV) being bought by buy-out funds over the last 10 years,” he said.

“One primary factor driving this discount is that the small-cap private equity segment is less intermediated, and deals are often sourced through proprietary networks rather than through competitive auctions,” said Mr Poggioli.

The small and mid-cap segment makes up the bulk of the private equity space, accounting for 98 per cent of all private equity funds in the market and 90 per cent of all buy-out deal volume in Europe.

Access’ analysis^[1] reveals that upper quartile small and mid-sized buy-out managed funds, or those assets under management (AUM) of less than €1bn and with a €275m average, have outperformed larger managed funds (having more than €1bn with a €7 billion average size in AUM) on a net total value to paid in (TVPI) basis,^[2] as the chart below shows.

In explaining the more attractive returns, Mr Poggioli said smaller companies are usually less mature than large company target in terms of how efficient and developed their businesses are and offer the potential for greater growth and scale than buying larger businesses.

“As such, incoming private equity investors have more space of actions to drive growth by strengthening and supplementing management teams, improving operations and financial controls, introducing new product lines, expanding internationally, or increasing sustainability to capture long term strategic value. In contrast, large buy-out investments have in the past strongly relied on deleveraging to achieve returns,” he said.

“We anticipate our smaller buy-out funds to deliver net internal rates of return (IRR) greater than 15 per cent over 10 years. Our funds have also demonstrated much lower volatility in returns than listed markets across the cycles,” he said.

“Across the private equity market, returns on smaller buyout funds are strong. Based on Access’ analysis covering 518 European small and mid-cap private equity funds with AUM below €1bn over 1999-2021 vintages, first quartile funds have delivered an aggregate net IRR ranging between 15 per cent and 43 per cent per annum depending on vintages, while the 2007 vintage was the most affected by the major financial crisis, yet the performance remained solid at 15 per cent,” he said.

However, the dispersion of returns is higher among small and mid-cap managed funds than among their larger counterparts.

“As a result, investors need to apply rigorous due diligence process when selecting small and mid-cap funds to generate superior performance, he said.

“Still, smaller companies are ideally placed to serve as a platform for buy-and-build strategies, allowing for consolidation and external growth. As such, fund managers have increasingly been engaging in these strategies, which, if executed correctly, are a good way to deploy capital at reasonable valuations, promote revenue and cost synergies and create value. Such enlarged companies are more attractive to potential acquirers and investors and thus command a higher multiple upon exit than at acquisition,” said Mr Poggioli.

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