GP Profile: Ergon hones in on long-term trends, ESG agenda

Ergon Capital Partners V (ECP V) held a final close in May 2022 on EUR 800m and is the European mid-market GP's largest vehicle to date. The fund is almost 40% larger than its predecessor, which held a final close in March 2019 on EUR 580m.

Given the increased size of Fund V, Ergon expects to make 12-14 deals from the vehicle, versus 10-12 deals from its previous funds. "We don't plan to increase our deal sizes, but we could do a few more deals in this fund," de Limburg said. "We have been disciplined in ticket sizes in the past, and could do some larger ones now, but there is no strategy to increase ticket size."

Ergon generally deploys EUR 25m-EUR 100m in equity per deal and plans to continue its strategy of buying companies off-market, seeking to internationalise and professionalise them. "We are very agile in primary, less intermediated situations, such as deals with families and founders," de Limburg said. "If we wanted to target larger deals, we would likely have to go into larger and more intermediated situations, where we would potentially lose our agility."

Fund V has allocated around 20% of its capital to date, corresponding to EUR 150m, de Limburg said. This has been done via three deals that have been closed and signed in Benelux, Spain and Germany. The GP has signed one further deal amounting to another EUR 40m in deployment.

"We activated the fund last July and we have a strong pipeline," de Limburg said. "We could be 40% deployed by the end of this year."

Trends-based investing
Although the current challenging market environment is naturally on the GP's mind, its portfolio developed well over the course of the Covid-19 pandemic, de Limburg said. Ergon's portfolio experienced double-digit growth during the two years of the pandemic, he said, demonstrating the resilience and growth coming from its focus on sub sectors supported by positive long-term trends. The GP considers itself a trends-based investor, rather than a sector focused investor, according to de Limburg.

Following the fund close, Ergon plans to make new deals and complete a number of exits over the next year. "There will be no massive change in our priorities, but we will be increasingly vigilant on where we put our money and at what price," de Limburg said. "We are entering a more difficult cycle, so looking at sectors, growth and resilience are important, which we have successfully found by focusing on sub-sectors supported by the right long-term trends."

Ergon sees a need to deploy cautiously to combat the current macroeconomic uncertainty. "We have always been conservative with leverage and valuations, but we will be increasingly prudent," de Limburg said. "Still, this will not come at the expense of deployment – we still have a rich pipeline of opportunities, many off-market, where we can create substantial value on a longer-term basis, even in a more difficult market environment."

Geographic expansion is not currently on Ergon's agenda as it continues its prudent deployment, de Limburg said. "We feel that going to another geography where we would be less legitimate and no one is waiting for us is not something that makes sense at this time," he said. "We would never say never to more expansion, but at the moment we still have a lot of room to grow in our current geographies."

Ergon's team has been growing by five people per year in recent years, and expanding the team is still a priority. "The biggest bottleneck we have had is the teams' bandwidth, so we need to keep hiring more people, step by step, as people fitting with our culture is paramount," de Limburg said.

"We see a lot of potential in every single market," de Limburg said. The GP currently operates in the Benelux and DACH regions, as well as Italy, Spain and France, but does see room to grow in particular markets. "Not due to the size of the market but to the nature of the markets and their targets, DACH and the Benelux region are very large ponds for us to fish from. These places still have a lot of family- and founder-owned businesses, and we have larger teams there too at the moment."

ESG agenda
Alongside the development of its team, Ergon has been working on developing its ESG strategy. "ESG is not new to us and we have been a member of the UN PRI for 10 years, but we have made massive jumps in how ESG is involved in every level of what we do over the past five years," de Limburg said.

Paris-based managing director Patrick Gavoty is focused on ESG full-time, de Limburg said, noting that "he is animating ESG at our level and our portfolio companies."

Ergon has also set up the Ergon Capital Fund, which focuses on charitable youth and education causes, de Limburg said. The GP also supports initiatives such as workshops with disadvantaged young people, mentoring programs, or fundraising runs to support children's hospitals, he added.

Beyond the initiatives implemented by its foundation, Ergon incorporates ESG into the way that it works with the companies that it owns. "We support our portfolio companies by organising training and assisting with carbon footprint, employee satisfaction surveys and 360 HR reviews, and governance reviews," de Limburg said. "Our three building blocks are carbon, social, and governance. We have organised a standard toolkit for every portfolio company and we want every company to have as strong as possible a position in ESG on exit."

When it comes to exits, Ergon often sells its portfolio companies to larger PE players or logical trade buyers, de Limburg said. Its recent exits include the sale of ophthalmic lenses producer Indo to Apax and Mubadala-backed Rodenstock, as reported.

"This is a virtuous way of doing business and it makes us more attractive to employees, LPs, portfolio companies and management teams as a partner," de Limburg said. "All our stakeholders have been receptive to these developments, and as we invest a lot of families and entrepreneurs' money, these investors need to know that we are a reputable firm."

[Editor's Note: This article has been updated to add Italy to the list of geographies in which Ergon is active and to amend the job title of Patrick Gavoty.]

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