Minority investing gains traction in southern Europe

An abundance of dry powder and the forecast economic downturn on the horizon have pushed investors towards experimenting with more diversified and varied ways of deploying their capital in southern Europe – following in the footsteps of the more established markets of western and northern Europe.

In the first 11 months of 2019, the region recorded 111 minority deals worth an aggregate €6.2bn, according to Unquote Data. In addition to traditional private equity funds that invest primarily in majority stakes but do not disregard the occasional minority investment, the region has seen an increasing number of GPs that exclusively specialise in minority stakes.

Notable deals include Tikehau Capital investing €29m in co-living company DoveVivo in exchange for a 19% stake in the business. A couple of months later, the GP bought a 23.4% stake in insurance broker Assiteca via a €25m capital increase. Private equity investor Nuo Capital also bought a stake of around 30% in personal care products manufacturer Ludovico Martelli, while investment firm NB Aurora acquired an 11% holding in leather producer Rino Mastrotto for €20m. Furthermore, Italian private equity firm FSI bought a 19.6% stake in biopharmaceutical company Kedrion for €100m from the founding Marcucci family via its FSI I fund, which held a final close on €1.4bn in March 2019.

Meanwhile, in Spain, Three Hills Capital Partners invested €45m in Goal Systems, a provider of optimisation software for the transport industry, in exchange for a minority holding, while Meridia Capital acquired a minority stake in pet care specialist Kipenzi.

"Investing in minorities sometimes represents the only way of entering the share capital of outperforming businesses, which are not for sale but need growth capital for their expansion plans," says Roberto Quagliuolo, private equity executive director in Italy at Tikehau Capital. "These companies' majority shareholders have no intention of ceding control because they believe in the high-growth potential of the business and prefer to remain largely invested. At the same time, they want to benefit from a financial partner able to inject fresh resources through a capital increase and support their expansion through its geographical reach and know-how in specific sectors and industries."

Minority challenges
The minority investing space continues to represent a niche within the private equity market across southern Europe; it is much less overcrowded than the majority arena and usually offers lower valuations. Most minority sales do not involve auctions and allow GPs to avoid fighting fierce competition and overpaying for an asset. However, without a proper sale process, origination can be challenging, and requires a wide network of advisers and contacts to source the best assets available.

NB Aurora managing director Lorenzo Baraldi says: "We usually avoid auctions and count on networking for our origination. Being a well-established and well-known player with a long track record is also essential. Furthermore, this is a space that rewards truly authentic minority investors, which have made this strategy their mission, rather than traditional private equity GPs that use minorities as an ancillary strategy to put capital to work or covertly gain control of a business."

Despite their current success, minority investments are not for everyone. In addition to widespread connections, they require specific expertise and can be very complex and demanding, especially in terms of legal agreements.

"Minority exit agreements often include a lock-up provision, a timeframe during which controlling shareholders are prevented from selling their interests and exiting the company," says Federico Bal, partner at Gattai Minoli Agostinelli & Partners. "They can also include rights of first offer and first refusal, and drag- and tag-along clauses, which require or allow minority investors to sell their shares to a potential buyer at the same time and price as the majority shareholder. These power mechanics represent the crux of the negotiations. How they are deployed and balanced depends on the quality and value of the asset being sold, as well as on the negotiating strength of the minority investor entering the share capital." 

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• Topics
• Southern Europe
• Investments
• Minority investing
• Italy
• Spain
• Portugal
• Unquote Data