GP Profile: EMH aims for three deals per year following close of second fund

EMH's second fund held an interim close in April 2020, six months prior to the announcement of its final close, as reported by Unquote. The fundraise was delayed by four to five months due to the coronavirus pandemic, says Maximilian Kuss, managing partner and co-founder at EMH; although much of the process took place prior to the outbreak. "For the last mile of the fundraise we were facing travel restrictions, and the fact that people were forced to fully digitalise their due diligence work. So, it took some time and serious efforts for us, our investors, our advisers, and all parties involved to adapt the thorough and extensive legal, financial and other processes to the new situation."

However, EMH was able to reach a final close with a fund volume €300m greater than that of the GP's predecessor vehicle, which held a final close in June 2017 on €350m. The LP base of EMH's latest fund includes US endowments, insurance companies and pension funds.

The GP's portfolio has broadly fared well in spite of the pandemic, Kuss says, and EMH took the decision to hold off on new platform deal-making in favour of backing its existing portfolio when the crisis first hit. "On the portfolio front we were, and we are, focused to support our entrepreneurs in the midst of the Covid-19 wave, and we paused deployment," explains Kuss. "We felt that we were better off supporting our businesses, making sure they were well-positioned and stable. And to make sure we could participate in the post-Covid era, to use the rebound effect."

"We do see a challenge in terms of pricing," says Kuss of the current market. "Prices are higher than pre-Covid in many fields, which is both good and bad for us. And given the current second wave, it is hard to price assets right, but it is a prerequisite to fully understand the market, the outlook and the expectations also from a Covid-19 and – hopefully soon – post-Covid perspective."

Assessing opportunities
EMH targets profitable businesses with revenues of around €50-500m and EBITDA of €5-50m. EMH does not have a set enterprise value range for its investments, although it can acquire companies in small-cap deals (€30-50m) through to mid-market transactions (€150-200m). The GP can also make larger deals with co-investments. Its enterprise value sweet spot is €50-150m.

"We predominantly focus on the DACH region, target market-leading owner-managed Mittelstand companies, and support and extend their growth journey via entrepreneurial, digital, financial and technology expertise," says Kuss. "We do both minority stakes of at least 25% and majorities of 70-80%."

The GP generally uses moderate leverage of 1-2x but with scope to take on further leverage to support inorganic growth. "The fund has a lifecycle of 10 years plus, and the average holding period is four to seven years. We don't over-leverage the businesses; we clearly focus on developing growth and value, and we extract value organically," says Kuss.

In terms of sectors, EMH focuses on growth investments, generally in its three core areas of business services, healthcare and technology, but can make deals on an opportunistic basis. "We predominantly invest via primary deals, and we have had access to really decent multiples," says Kuss. "We don't over-pay, we are fair in all respects, and we can and do help with more than just capital. I am convinced that this philosophy – or if you prefer to call it, strategy – is also the main reason why the crisis did not hit us and our fund as it hit others."

Kuss cites Occhio as an example of its focus on digitalisation in value creation. "Occhio was partially digitalised, and by shifting from halogen to LED and then adding smart home functions, we have now fully digitalised the business. We like to identify and install technology to enable growth and profitability."

Steady development
EMH expects its deployment pace to remain steady during the fund's investment period, says Kuss: "We generally make around three platform deals per year, but can also shoot for more investments if needed." The GP also expects to see dealflow pick up in the coming months. "We have seen more activity as more and more entrepreneurs have intensively observed how we do our work and how we cooperate with the founders of our investments. They are more open to talk to EMH as a third-party capital provider, and the environmental and global challenges ahead underline this development."

Fund I made five investments, while Fund II has made two platform investments, both of which were announced in September 2019: the vehicle acquired a minority stake in retail branding and marketing consultancy Liganova Group and a majority stake in marketing firm Avantgarde.

The GP has completed six add-ons in 2020, including Brainlab's acquisition of Chicago-based medical training video game developer Level-Ex in June 2020. EMH also increased the stake it holds in audio production and DJing hardware and software company Native Instruments – EMH now holds a majority stake in the business. EMH also completed a co-investment, which is to be announced in 2021, according to Kuss.

The firm appointed two new team members to its investment team in 2020 and announced a number of promotions. As of January 2020, Philipp Englisch, Benedikt König and Heinrich Markowsky were promoted to senior associate, Konstantin Leu to investment manager, and Simon Joha to senior investment manager. EMH appointed Dominik Schwarz as partner in July 2020; he joined the firm in 2018 from Chequers Capital; while new director Mario Sabljo joined the team as director in May 2020, having spent almost nine years at Paragon Partners.

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