IK launches mini-cap strategy in UK and Benelux with robust pipeline

In the UK, it is actively working on around half a dozen situations for the new strategy, all at different stages, Gallix said. The team has attended several management presentations, while others are already being looked at more closely in pre-investment committee meetings. It could see one deal to be signed by the end of this year, he added.

Its Development Capital team is also actively working on one situation in Netherlands and another in Belgium. The team has already attended management presentations, with one situation now going through due diligence, he said.

The progress follows the GP’s launching of the new strategy in the two markets earlier this week. Development Capital, which already invests in France, Sweden and Germany, sits within IK’s Small Cap III fund, which closed at EUR 1.2bn in 2021. Around EUR 300m of the fund is devoted to Development Capital, which has so far made five investments during the last year with 60% dry powder remaining, he added.

In the UK, the strategy will be led by Simon May, who joined IK’s small-cap team in 2020 and has been involved in the Forthglade and DA Languages transactions. Benelux is headed by Frances Houweling, who joined IK in 2013 and previously sat within the Benelux small cap team, with which she was involved in a range of transactions, including the recent 2Connect and Plastiflex transactions.

Gallix told Unquote that IK’s expansion of the strategy has been borne primarily out of the GP’s ambition to broaden its opportunities pipeline by leveraging on its existing geographical coverage for its other strategies . “For the UK, where we’ve been present since 2020, it’s one of the major markets for PE in Europe. You can’t escape it when you’ve reached a certain status as a fund,” he said. “For Benelux, where we’ve been active for over 20 years, there are a lot of opportunities in export-driven companies,” he said.

Investments

Development Capital invests EUR 10m-25m tickets in companies of EUR 50m EV or less – in contrast to EUR 25m-75m equity investments it can make in companies for the small-cap strategy – and can buy both with minority and majority stakes. Similarly to IK’s wider strategy, it will focus on businesses within the consumer, industrials, business services and healthcare sectors.

“What I do see now is a return to grace in sectors and industries that have been neglected in recent years. Over the past few years, a lot of funds invested in tech and paid very high multiples, with unrealistic forecasts and crazy growth rates. Meanwhile, there are still plenty of traditional opportunities at more reasonable prices, not only in Netherlands and the UK, but across all geographies,” Gallix said.

Given the focus of small companies in the strategy, the thought processes needed before making an investment do vary from the considerations made with larger companies. “The advisors for Development Capital are not generally running huge auctions and we can enter quasi exclusivity much earlier, especially if you've done your homework, seen the potential to develop the companies and started establishing good relationships with management teams,” he said.

At the same time, sell-side generally have less data and information on the company simply because it either doesn't exist or they have not been able to provide it. “We enter into due diligence knowing a bit less than what we would generally do in larger deals,” he said.

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