In June, funds advised by CIP have invested in AWS / Orbis alongside our Deal Partner Cadence Equity Partners and other institutional investors. AWS is the leading provider of standpipe rental and other services to UK water utilities. Orbis is a research and development company specialising in applied technologies for the water utilities industry. The combination of the two businesses will further strengthen AWS’ leading market position and allow the company to expand its offerings into helping pipe infrastructure owners and operators to make data-driven decisions. AWS / Orbis were bought from their US based parent company. CIP is especially excited about the solid, downturn-resilient base revenues combined with the upside potential generated by the application of Orbis’ market leading technology as well as the deep, “spot-on” experience of the company’s management team.

Our strategy of investing in European small-cap companies with low exposure to market-cycles, high margins and solid fundamental growth - and doing so with little or no leverage alongside experienced local deal partners - has been paying off. Of our six investments executed since 2019, five remain on track or could even increase their sales and profitability during the Covid-19 period. One company was hit harder due to its “live event” sector focus, but management and sponsor took all the necessary actions quickly and decisively to position the company for the future:

The private equity “deal-doing” environment certainly has become more challenging over the last months. Doing deals with independent and emerging sponsors on a deal-by-deal basis has its own specific challenges but will also offer many opportunities over the next two years:

CHALLENGES

Buyer-seller expectations are slow to adjust:

In the last global financial crisis we have seen that it takes 6-9 months until owners accept the new reality of lower multiples when they sell their businesses. In the short term, this will result in many fruitless negotiations and “no-deal” situations, which we must accept. Patience is key. Better letting pass a deal than over-paying in uncertain times.

Independent sponsors become literally “fundless” sponsors:

For deal-by-deal sponsors, securing the necessary capital for a deal in order to be credible to the seller has always been a race against time. With decreased risk appetite of investors, this will only get more challenging. This is true for our deal partners as well as for ourselves. Previously established close ties to reliable funding sources are now key.

Understanding which business models have a future:

A “black swan” event like Covid-19 accelerates the disappearance of outdated business models. Online models, software as a service or (e)-health are certainly winners, but obvious winners will most likely see even increasing valuations. However, also more traditional business models will survive and thrive while being more affordable. Our most challenged portfolio company for example, active in the “live event” industry, might in fact be a long-term winner. With people spending more time close to home, live events might be an attractive “affordable luxury” when lockdowns ease fully. This may well be a great opportunity for the most solid market players. Smart investors will seek to understand the true economic drivers for each company, without jumping to generalised “sector conclusions”.

OPPORTUNITIES

Finally, pricing might become more reasonable:

We advised investors on six European small-cap deals at an average valuation of below 6x EBITDA, as opposed to double-digit EBITDA multiples observed in the large cap space. While we are very happy about our price discipline, we believe the future will show even better “value for money” opportunities.

Being the “reliable source of funding”:

Many of our deal partners were considering raising a first fund. Sadly, this will be substantially more difficult for first time managers in the next 1-2 years. Investors focus on re-ups and on super-established GPs, or reduce new commitments. Many emerging managers will therefore continue to operate under the “deal-by-deal” approach. For CIP this means that we can position ourselves as the reliable source of funding for the next few deals of our deal partners.

More emerging managers:

During crisis times, the frustration level in large private equity firms increases: trouble shooting in a large number of portfolio companies rather than deal-doing, reduced earnings potential as certain funds drop out of carried interest and the “old guard” holding on to their leather chairs… Previous crises have shown that many highly talented and senior deal partners use the opportunity to go their own way and set up shop. We are looking forward to evaluating and potentially supporting their first deals…

No or small legacy portfolios:

Most independent deal sponsors have very few transactions in their portfolio. They can focus their energy and time on sourcing new opportunities rather than working out troubled companies.

Full attention:

Independent sponsors must get their first deals right. Otherwise they will not have a future. The one or two deals that might already be in an independent sponsor’s portfolio therefore get their full attention.

As our name says, we are partners in getting good deals done. Partners for our investors, partners for our deal partners. Our clear focus on European small-cap transactions sourced from and led by independent sponsors, positions us uniquely in the European small-cap investment landscape. Our business model allows us to see more investable deals than any individual local small-cap fund can generate in any given year. We can therefore be extremely selective. As we are sector agnostic, we can benchmark each transaction against other opportunities and invest in an unbiased manner.

The next two years will certainly generate outstanding small-cap direct investment opportunities, which we will seek to pursue together with our investors.

Please contact us if you would like to build your European small-cap exposure with us or if you come across an exciting investment opportunity.