Philippe Poggioli

The heightened volatility and unpredictability of US trade policy has made Europe more attractive to investors seeking stability and certainty, according to Philippe Poggioli, managing partner of Access Capital Partners, a leading European private equity firm focused on small cap buy-outs through primary fund commitments, secondary transactions and co-investments.

The fund manager sees strong opportunities in Europe, with Donald Trump’s return to the US government introducing greater stock market volatility and economic uncertainty in the world’s biggest economy. In contrast, European small cap buy-out returns have shown resilience in the last three years with superior liquidity for investors versus larger cap deals.

That has clearly resonated with institutional investors who are increasingly turning their attention towards investing in quality small cap businesses across Europe. “More broadly, there has been a visible shift of capital towards European assets, as the region is perceived as offering more predictable regulatory and economic conditions compared to the US,” Poggioli said.

“While trade tensions and protectionist measures in the US have moderated the pace of cross-border merger and acquisitions activity, these dynamics also encourage private equity firms to reassess their risk profiles, strengthen supply chains, and prioritise resilient sectors such as IT, healthcare, and business-to-business (B2B) services, spaces that are less exposed to global trade disruptions and supported by structural trends like digitalisation and demographic change. This context highlights the importance of adaptability and the importance of a focus on long-term value creation for investors.

“Small cap buy-out transactions lend themselves particularly well to buy and build strategies whereby private equity firms create European champions by aggregating several companies to consolidate a given sector around the best management team. This strategy is at the centre of their return pattern and is tremendously relevant in the fragmented European context,” Poggioli said.

The small caps sector, where companies are valued at less than €100m at entry, presents very different dynamics to the mid-caps and large caps sectors, according to Poggioli. While falling interest rates is positive for economies overall, it is not as important for small cap investments, where the quality of an underlying business is crucial for an investor’s return.

“While improved financing conditions and stable rates have supported overall market sentiment, they have not been the primary drivers of deal flow or valuations in the small cap space. Instead, factors such as the quality of the underlying businesses, local market dynamics, and the ability to execute operational improvements and drive value creation remained more influential,” he said.

More broadly, as interest rates stabilise and fall in some countries, improved access to debt is supporting renewed M&A activity, especially in the mid-to-large-market segment.

“This is expected to facilitate both new investments and exits,” said Poggioli.

“Despite global turbulence, Europe is increasingly seen as a relative safe haven, attracting capital seeking stability and diversification. Recent months have seen renewed inflows from both domestic and international investors, including US investors, as confidence in Europe’s economic recovery grows.

By Philippe Poggioli, managing partner of Access Capital Partners

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Mr Wegelius said falling interest rates should benefit infrastructure investments by potentially supporting asset valuations and enabling asset owners to reduce the costs of credit needed to fund growth.

“Given the essential and long-term nature of infrastructure assets, we would expect this asset class to perform well in a scenario where official rates fall. The European Central Bank is indicating that inflation is falling, and so we expect interest rate cuts in the near to medium term, which would underpin the performance of infrastructure assets,” said Mr Wegelius.

Several megatrends favour growth of the infrastructure sector. These include digital transformation, the transition to clean energy, urbanisation in emerging economies and transport decarbonisation.

“The digital transformation, for example, is resulting in soaring demand for telecommunications infrastructure. The rollout of 5G networks, acceleration of fibre network deployment, the increasing demand for bandwidth and the rise of artificial intelligence (AI) are all driving greater need for data centres and infrastructure investment.

“Within Europe particularly, we have seen increased deal activity for telecommunications towers, fibre connectivity and data centres,” Mr Wegelius said.

In the energy and utilities sector, an estimated €1 to €4 trillion of infrastructure spending globally is needed by 2030 to achieve a commitment to carbon neutrality by 2050.

“Investment in clean energy would need to triple by the end of the decade to keep the 1.5°C target in sight^[1], so we are seeing significant growth in the volume of renewable energy projects being launched and greater need for private sector funding. Along with that, we are seeing greater diversity of renewables projects, such as small-scale hydro and solar, biogas solutions as well as more wind solutions,” he said.

“Europe – and particularly the European Union (EU) – is clear on its policy of making the environment a key priority within its legislation and targets. The net-zero target of becoming climate-neutral by 2050 has been written into law and the urgent need for investment in clean energy is creating huge opportunities for investors,” he said.According to Mr Wegelius, Europe is home to the largest infrastructure market globally, with the greatest value deals last year and the number of deals in 2022 and 2023, as the chart below reveals.

Brownfield delas by value (in €BN) and number

Source: Infralogic, as of April 2024

“The European infrastructure market is mature, stable, and can provide a high potential for diversification through the opportunities spread across 27-plus countries and different regulatory frameworks,” said Mr Wegelius.

According to Mr Wegelius, high public deficits in Europe and other developed nations are also creating a greater need for the private financing of infrastructure projects. “In addition, the increasing integration of the EU market, the reduction of monopolies and higher levels of government debt also support growth of the infrastructure sector,” he said.

The appeal for investors from infrastructure is the defensive nature of cash flows, which are often linked to inflation. “Assets such as power generation and distribution, water and waste utilities, data centres and fibre networks offer services that are fundamental to a functioning society with a good level of inflation protection through regulatory, contractual or structural means.

“As a result, infrastructure assets tend to be able to pass-through cost increases, whether it be higher credit or energy costs, to keep up with inflation. It is this resilience compared to other asset classes that enables infrastructure investments to be a defensive asset class with good cash flow visibility,” said Mr Wegelius.

Access’ approach is to favour infrastructure investments in stable, regulatory or geopolitical jurisdictions whilst maintaining diversification across geographies, sector and asset types.  “We typically examine opportunities across countries in Northern, Western and Southern Europe which includes the UK. We aim to create added value for our investors through our approach of selecting the best opportunities with the best partners in geographies or sectors that they know best,” Mr Wegelius said.

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[1] Source: EY – Infrastructure sector outlook – December 2023

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