Capiton aims to launch EUR 600m fundraise for seventh fund in 2024

Fundraising for Capiton VII could begin as soon as next year’s Q2-3, depending on the GP’s deployment progress, liquidity events and market sentiment, among other factors, they said.

Its expected timeline could mean that the firm ends up in the “fortunate situation” of avoiding the problems many have encountered in the current fundraising market, they said, noting that many of its LPs are focusing on re-ups instead of new GP investments in the current “difficult environment”.

“I'm hoping it will be a better funding environment next year, but we're focusing on ourselves and what we need to do to get there,” said Hertweck.

“We know we need to deploy a certain amount of capital and to make exits before we can fundraise and to show certain developments before we will fundraise. But that's driven out of our needs rather than the market,” he said.

The upcoming fund, which is expected to be EUR 100m larger than the incumbent Capiton VI vehicle, is not expected to see the GP change its strategy. Capiton focuses on small- to mid-cap healthcare and industrial technology across Europe’s German speaking regions, they said. However, there is flexibility to invest in areas outside the two sectors, especially if they have a strong sustainability angle, they added.

“We want to remain in our small-mid market segment and hence the small increase in fund size,” said Hertweck. “If you look at the number of companies in Germany above EUR 100m EV, the number becomes much smaller. There's a lot more companies in our field.”

This part of the market is typically more active than the large-cap space in challenging environments, given that it is less dependent on leverage, they added.

Mara Stock, partner at Capiton

 

LP base expansion

Capiton has historically had 70% re-ups from LPs for its funds and will expect this trend to continue for its upcoming fund, they said.

While most of its LPs are European institutional investors, it will continue to broaden its LP base, including via Middle Eastern investors, he said. Initial conversations are also starting with Asian investors, although many of them are on the larger size with hopes of committing large tickets, they said. Meanwhile, North American investors are focusing increasingly more on their home market.

Capiton is seeing more inbounds from potential LPs than it has over previous years given investors’ appetite for mid-market deals, they said.

Deployment and exits

The GP’s current priorities include preparing exits of three of its portfolio companies, which are expected to come to market between 2023-24, they said. Unquote sister publication Mergermarket recently reported on the exit plans for its pet-food brand platform AlphaPet Ventures. Advisory boutique Stifel is managing the sale process of the mid-sized group.

Portfolio companies with the highest likely-to-exit scores include the 2018-acquired German private-label over-the-counter drug company EVP Group, as well as Cedes, an optical sensors manufacturer acquired by the sponsor in 2020.

Meanwhile, its sixth fund, which has deployed around 60% of capital across 10 companies, has enough dry powder to carry out three to four more transactions over the next two years, they said.

Capiton is investing and exiting against a “relatively slow” M&A market with price discovery discrepancies between buyers and sellers still yet to be established, resulting in some processes being ultimately pulled from the market, they said.

“If you have top performing assets, as the experience of previous crises showed, those companies can still get transacted at great multiples,” Stock said. “But all processes that are still in the market are taking longer with more complex, longer negotiations needed.”

*Mergermarket's LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.

[Editor's note: Post publication, the article has been amended to clarify in the third to last paragraph that Capiton's sixth fund has sufficient funds to be acquisitive in next two years, and to correctly spell managing partner Manuel Hertweck's last name.] 

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