IK Partners mulls mid-term Southern European expansion

A future stop to make deals in Southern Italy would be a natural move for the pan-European sponsor given that many of its portfolio companies have increasingly expanded there, including via bolt-on acquisitions, he said. "This means that we know the ecosystem and have the right network to pursue transactions," Soudry said.

Within its portfolio, Skill & You, an online vocational e-learning in France and Spain, is looking at buy-and-build strategy in support of its core geographies and expansion further afield. IAD, an European digital network of independent real estate agents based in France, also has presence in Portugal, Italy and Spain.

But any new office openings will likely be in the medium to long-term, Soudry said, noting that the firm is currently focused on its existing geographies including Benelux, DACH, France, Nordics and the UK.

IK Partner’s potential Southern push follows the buildup of the UK mid-cap team announced in late 2021, as reported. The GP has since gone on to hire a four-man team in London, including Pete Wilson, ex-head of 3i in the UK. The UK team is hoping to complete “at least” one investment this year and it is currently looking into a number of opportunities, he said. No deals have been signed yet in the UK yet, he added.

"In the context of Brexit, we are able to offer British companies our proposition whereby they would be backed by a pan-European fund with experience in continental European build-ups. This could be a pretty attractive proposition in the small to mid-cap space," he said.

Earlier this year, the sponsor also launched its mini-cap strategy in the UK and the Benelux region with the rolling out of its Development Capital strategy in those markets, as reported by Unquote.

Investment progress

IK Partners is in the fourth year of deployment of its IK IX Fund, which raised EUR 2.9bn during COVID-19. The vehicle has completed 12 platform deals and more than 30 add-on acquisitions, meaning that it is “pretty advanced in terms of deployment”, he said.

According to Unquote Data, IK X Fund was launched last February with an undisclosed target. Soudry declined to comment on any upcoming fundraising plans.

He acknowledges that the investment environment and deal flow across the market have both seen a slowdown given the uncertainty of the macro environment and current trading of companies “being challenged”. This has affected IK Partners to some extent, with the mid-cap strategy executing four deals last year compared to the six deals it signed in 2021.

“Overall, there has been even more selectivity at IK in these challenging times and so this naturally means we’ve been doing less deals in 2022,” Soudry said. “We expect 2023 to be in line with this, if not a bit more than what we did in 2022.”

The GP is looking at a more conducive post-summer environment when there could be more deals to come to market. Dealmakers are pinning on hopes that by then, economic uncertainty and inflation will start to recede, while companies will show more predictably in earnings, he said.

Despite the uncertain macro environment, IK Partners believes that its focus on the mid-cap space will continue to offer opportunities to strike deals, he said. There remains large number of companies out in the market, while financing from debt funds is still available for deals within its size range, he said.

One area where IK is pushing hard on is sourcing deals via its sector teams dedicated to originating new investment opportunities, he said. “We generate quite a high number of leads and because of this, the deal flow that we've seen in 2022 has not been materially different to the previous years. It has enabled us to stay very selective about the companies we invest in, pursuing opportunities where we feel we can add real value.”

In auction processes, the firm is seeing vendors and their advisors take on less structured processes and broad approaches, he said, noting for example that they are pre -marketing assets more extensively, but only to a limited number of potential buyers, he added. “This favours parties like IK which have been in the market for a long period of time and have been involved in bilateral situations either on the buy side or the sell side,” he said.

In the meantime, IK is looking to “accelerate” its buy-and-build strategy, increasing the average number of build-ups per platform company to four or more from the three-add-ons per portfolio company it has historically done, he said. “When we talk to owners of add-on targets, we find that an increasing number of them are willing to consider joining a bigger platform where they have an option to reinvest alongside us.”

Confronting challenges

The macro environment is confronting IK from all sides, whether that be in inflation, supply chain disruption and labour shortages, Soudry said, while emphasizing that it is proactively providing operational support for its companies and careful considerations for future investments.

The macro environment has inadvertently affected the cost of financing, which means that finding an agreement on valuation between buyers and sellers is getting harder.

“In the mid-cap space, it is fair to say that liquidity has remained relatively healthy, as this particular segment of the buyout industry does not mainly rely on syndicated debt, but rather on less volatile direct lending or traditional bank financing," he said. "Of course, no asset class lives in isolation and our capital markets team have seen terms and conditions evolve substantially in the recent past.”

In its push to reach a mutual agreement with sellers, he said IK has been pushing for flexibility in deal structure by offering owners and management the opportunity to reinvest alongside the sponsor.

[Editor's note: The headline has been updated to clarify that IK Partners will consider expanding to Southern European countries in the medium-term.]

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