Naxicap preps for Fund III with eyes set on DACH, Benelux expansion

The Paris-headquartered GP is expected to come to market for its third small mid-cap buyout strategy "soon", following an "extremely active" 2021, when it deployed close to EUR 1bn in capital across 13 deals. Naxicap Investment Opportunities Fund II, which closed on EUR 856m in 2021, is now fully deployed, he said.

Firepower for the third fund could be further bolstered by co-investments, a successful strategy used by Fund II, which brought the fund to EUR 1.5bn in aggregate commitments thanks to an additional EUR 700m contributed by co-investors and specific mandates, according to a 2019 statement by the sponsor.

"We will continue our small-mid cap strategy [as] we are not doubling the fund size from our current Fund II," Pergovacz said of the upcoming strategy. This includes a focus on companies generating EUR 5m to EUR 40m in EBITDA across sectors.

With plans for a potential base in Amsterdam, the new fund is set to strike even more deals in the Benelux and DACH regions, advancing further on the 20%-25% of deals made in the two regions through the second fund, he said.

"As our business grows, we are interested in opening up new locations in Benelux and also within DACH," Pergovacz said, speaking from the Frankfurt office opened by the sponsor back in 2018. "We want to take a more strategic view on the Benelux market, where we did several deals and where our largest portfolio company is located."

Naxicap is sensing greater opportunities for domestic and international private equity players in Germany, he said, citing the EUR 15bn- EUR 16bn of private equity deployed in France per year, versus the EUR 7bn- EUR 8bn annually invested in Germany, despite it being Europe's largest economy. Other factors also point to Germany's favour, such as valuations, where it still "feels a little bit" behind France, he added.

"The strategy of coming to Frankfurt was to expand in DACH where we've had experience in the region after having made bolt-on acquisitions for some of our platform companies," he said. "Given our large investment team, we are [already] seeing the vast majority of the French small and mid-market pipeline, so we decided to expand into new territories," he said.

Risk-averse nature
With the global economy facing increasing headwinds, Naxicap believes that the risk-averse nature of its fund will help ride out the volatility, Pergovacz said.

Although a generalist investor in name, the sponsor has tended to operate in a select few sectors, most notably in healthcare and pharmaceuticals, but also tech, B2B businesses and consumer, among others, he said.

"We do not know what the future brings, but in the current uncertain market environment, healthcare is certainly one of the most interesting sectors, given its risk-averse nature," he said, pointing out that 40% of Fund II's deals were in that sector. The next largest exposure for that strategy is in tech at around 10%-12%, with the remaining assets operating in a mixture of other sectors.

The sponsor's exposure to healthcare is balanced by its interest in growth fields such as e-mobility, Pergovacz said, highlighting its investment in Swiss e-bike brand myStromer last year.

"We have a very balanced portfolio between growth and value assets," he said. "We [would] certainly be pleased with an exit with 3.0x or above, but we very much focus on risk mitigation, and this strategy has proven to be successful."

Frothy valuations for assets have been one of the most contentious talking points for some investors, including Pergovacz. According to him, despite the increasing volatility in public markets globally, valuations for private assets have generally not yet been affected, although that can vary by sector.

"It will be interesting to see how this development goes, say from summer onwards," he said. "At some point sellers might have to accept lower valuations. We have seen a couple of deals where I would say we are getting exactly into this kind of discussion, where the asset is considered to be interesting, but not worth the current valuations."

The same issue has likewise affected the sale of its portfolio company, Teufel, a German audio equipment maker, which tried to go to the market last May, as reported by Unquote sister publication Mergermarket. It has since called off the auction process in March after Naxicap refinanced its existing credit facilities, according to Unquote sister publication Debtwire. Plans are now underway to expand the brand further in DACH, as well as in Benelux and Poland, he said.

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