Addleshaw Goddard is a leading adviser to European mid-market PE firms. Whilst the mid-market and growth capital segment of the PE market has grown significantly over the last decade, we may now be looking at a phase of consolidation – with smaller players consolidating to benefit from economies of scale. And where there is consolidation, there will opportunity for acquisitive for GPs to grow and diversify their offering and future proof.
Arguably a market ripe for consolidation. The BVCA has over 325 private equity firms as members, and market reports suggest the UK has around 400-450 private equity firms. Germany is reported to have around 300 private equity firms, and France close to 200. Whilst large cap funds and venture capital will account for a significant part of the market, a large proportion operate in the growth capital or mid-market segment which has more than doubled in size over the last decade.
Many investors are small outfits (in terms of team or portfolio size), and would no doubt highlight independence, agility, autonomy or highly specialised sector focus as strengths that ought to be attractive both to their underlying investors and to investee companies. Some of the larger cap funds suggest that this is misguided, however, given how saturated the market has become. Their argument is that smaller firms will be squeezed – unable to differentiate themselves sufficiently in such a crowded marketplace on the one hand, whilst unable to compete with the firepower of larger investment firms on the other. And then consider the wider fundraising trends in the private funds space – in the current environment it is the larger houses and funds that have had the most success raising monies from LPs.
Some mid-market operators have been scaling up for a while – increasing assets under management, expanding internationally, and introducing multiple fund strategies targeting different deal sizes or minority stakes. Many of those larger firms are also taking strategic equity investors onboard themselves – and whilst founder liquidity may also be a driver behind those deals, the underlying investors are no fools and wouldn't write the cheque unless they felt they could offer strategic benefits to drive more success.
What of the smaller players? They can't all be in the top quartile, and in a more challenging fundraising and deal execution environment isn't some degree of consolidation inevitable, notwithstanding the advantages that a smaller investment team can offer?
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