In recent years, investment platforms have had the wind in their sails. Antoine Dréan and Virginie Bourel, Triago’s Chairman and Partner, shed light on the emergence of new private equity brands.
Impending sector consolidation
“Private Equity is a 30-year-old asset class in Europe. It’s entering a mature stage,” declared Antoine Dréan. His opinion is that once LPs have endorsed a team they value, those LPs become open to, and even encourage, diversification by the investment fund. “That’s a big change. Once LPs have confidence in a management team for one private equity segment, once they have been able to establish the quality of their processes, their performance, their investment discipline, the fact that they buy at attractive prices, their sustainability, etc., they’ll support them in other segments, too.” The challenge for an investment fund is in assembling a strong team, in line with the firm’s values and quality, whether by recruiting, or by hiring an existing team with a good reputation.
Over the past few years, LPs have thus focused their relationships on major brands of private equity firms. “The rapidity with which private equity firms have been able to raise funds demonstrates that LPs are ready to support them on new areas of expertise,” Virginie Bourel pointed out.
While this phenomenon is relatively recent in France, it has existed for a long time on the other side of the Atlantic, with giants like Carlyle, Blackstone and KKR, which have developed across all segments. But what used to apply only to large cap funds is now affecting the middle market.
“It’s a way to demonstrate strength in a mature sector.” For firms that specialise in small cap, merging with an established brand is a strong signal to investors. “A lot of investors, particularly outside France, have a hard time entrusting significant allocations to small teams,” said Antoine. The advantage of critical mass thus makes a case for consolidation.
Small and Mid cap: complementary pillars
Like EPF Partners, which has joined Apax Partners [link to video], private equity firms respond to and anticipate the LP’s requests. “The small cap market segment is very active and deep in France, but the maturity of the field means that there is still competition on these small deals and, above all, a real need for support.” The GPs must therefore develop a very specific position. “If capital is their only proposition, they can’t compete.”
Antoine describes a fast-moving sector, in terms of both transactions and investment funds, “with new teams coming and going.” “Within a deal flow that is, by nature, larger than that for mid cap, the challenge is to attract the best corporate executives by offering the most complete support and, in this way, ultimately targeting performance.”
As for value creation, the platform rationale makes it possible to mobilise the appropriate means and the right skills. This is especially the case with digitalisation, which requires human resources and significant expertise. “It is easier for large funds to make resources available to small companies.”
Another driver mentioned by the Triago team: sector specialisation, still rare in small cap where a large majority of teams have a generalist approach. “Organisation by sector often only happens at the mid cap stage.”
Antoine and Virginie also see in these comparisons an opportunity for more small cap companies to internationalise. “There are many good companies, but very few are expanding internationally.” According to French customs statistics, less than 5% of the value of French exports come from SMEs and, according to the national French statistical agency INSEE, their exports represented only 10% of their sales in 2011. Antoine believes this is because there are fewer small cap than mid cap professionals who are able to contribute real value-added internationally and digitally. “Private equity platforms are in a position to offer entrepreneurs better access, because their teams already support more mature companies,” he concluded.
The ideal platform?
“It’s a platform that teams want to join, that is pre-validated by investors, and that attracts entrepreneurs.