In our 2023 whitepaper “European private equity: Is small better?” we suggested that investors looking to broaden their exposure to European PE might find a solution in the Small and Middle Markets (SMBO). Lower competition, attractive entry valuations, and lower correlation with public markets are just a few reasons why. But where exactly should investors look for this outperformance?
In this paper, we take an empirical view using specific criteria to answer that question. Generally, we found that specialization (whether by sector or geography) is key, and that many of the most attractive GPs focus on Northern Europe.
Methodology
To home in on the factors responsible for the success of Europe’s SMBO managers, we first narrowed the field to the top 30 managers based on gross TVM. We then determined where each manager stood on the specialization spectrum across two dimensions: sector and geography (Figure 1).
We focused on all investments made over the 10-year period from 2012 through 2022 for several reasons:
- A significant portion of each GP’s track record had been realized;
- Older deals (pre-2012) often no longer reflected the GPs’ current strategy; and
- Newer deals (post-2023) were more likely to be held at or close to cost.
This retrospective approach aligns performance with the strategies each GP employed at the time, offering a clearer picture of what drove outperformance during the period. While many GPs have since diversified across geographies or sectors, this methodology isolates the success factors behind specific strategies, revealing valuable insights into what worked—and why.
Fund size
For each GP in the top 30, we calculated the weighted average fund size (Figure 2). The results revealed an overwhelming outperformance bias toward the smaller end.
- More than half of GPs had a weighted average fund size of less than €500 million; and
- 83% had a weighted average fund size of less than €1 billion.
- Remarkably, only one GP qualified as Middle Market (i.e., a fund size between €2 billion and €7 billion) during this period.
The relative opportunity set within the Small Market may explain part of this trend. In Europe, a much deeper pool of companies is available for acquisition, reducing the likelihood of transaction intermediation and competition based on price at entry.1 The Middle Market, in contrast, consists of fewer companies and is more prone to competitive dynamics that could increase pricing, leaving less room for multiple expansion as a value creation driver at exit.2
Specifically in Europe, country and regional specialists tend to outgrow their local market opportunities when their funds exceed approximately €1.0 billion‒1.5 billion, depending on the region. To sustain this growth, these managers often expand geographically; however, this can introduce significant challenges, such as adapting to new business cultures, languages, and regulatory environments. Most firms may consequently face some return degradation when entering new markets.
Geography
Nearly 75% of the GPs on our top 30 list were either regional or pan-regional specialists (Figure 3).3 Of these, an overwhelming majority (85%) concentrated on Northern Europe, which encompasses the Nordics, Benelux, the UK and Ireland and the DACH region. Within this group, the Nordic and Benelux regions had the highest proportion of managers, followed by the UK and then the DACH region.
Macroeconomic factors, such as higher GDP per capita, innovation and business transparency partly drive this concentration.4 Regional nuances also play a significant role. For example, the Nordic PE industry has benefited from cultural openness toward external ownership and a stable, supportive local banking system that sustains deal flow even amid broader European economic challenges. Meanwhile, the Benelux PE market thrives on a landscape of outward-looking micro-cap businesses that have proved particularly conducive platforms for buy-and-build activity.
Sector
Seventy percent of GPs focused on three or fewer sectors. Among sector specialists, most (64%) were dedicated to Technology, while a large minority (27%) focused on Healthcare. Notably, only one Consumer specialist is included in the top 30 (Figure 4).
While there are fewer Healthcare specialists within Europe—and consequently fewer represented in the top 30—those that specialize in Healthcare have outperformed those in the Technology sector. Both Technology and Healthcare stand out as particularly attractive sectors within European PE owing to their relative defensiveness and strong secular tailwinds.5
Taking a closer look at the intersection of geography and sector (Figure 5), we observed that none of the top 30 managers combined pan-European coverage with a sector generalist model. Instead, the list included five pan-European sector specialists, and eight regionally focused sector generalists. Yet no GP that combined diversification across 4+ regions and 4+ sectors made it into the top 30. This underscores the importance of specialism—whether by geography or sector—in generating the strongest relative returns in competitive Small and Middle Markets.
We conducted a similar analysis of large- and global-market managers, which generally have had far longer histories and deeper networks compared with pan-European managers operating in the Middle Market. These larger firms have achieved their scale through strong and sustained historical performance. They often possess broader and deeper capabilities than middle-market firms, frequently including dedicated operating professionals and capital markets professionals. This enables them to add value both at entry and through investment holding periods.
However, even with these advantages, our findings revealed that the strongest large- or global-market manager with European heritage would have ranked only 26th. This means that 25 European small- and middle-market managers outperformed the top-ranked GPs at the upper end of the market.6
Themes
We also analyzed underlying investment themes for each of the top 30 GPs. Each of the three themes below was prevalent among more than half of GPs on this list, demonstrating a consistent thematic approach to delivering outperformance (Figure 6):
- Origination angles: This label was applied to GPs that generally sourced the majority of their assets at below market entry multiples, and in bilateral settings.
- Buy-and-build: Assigned when add-on acquisitions played a central role in a GP’s value creation strategy.
- Internationalization: Defined as the ability of a GP to facilitate international expansion for domestic companies, enabling growth beyond their core geographies.
Origination angles and buy-and-build were more common among GPs focused on fewer than three geographies. These GPs typically concentrated their resources within their core geographies, giving them a competitive edge in sourcing platforms on a bilateral basis and scaling them with add-ons to further reduce entry multiples.
As expected, internationalization was most common among GPs operating across multiple geographies. With broader office networks and greater resources, these GPs were well positioned to expand portfolio companies’ revenues into new markets.
So where are the opportunities?
The most compelling opportunities for outperformance in Europe are in the Small Market. Within this tranche, most top-performing managers are country or regional specialists, with an overwhelming 85% focusing on Northern Europe, which benefits from stronger macro fundamentals than Southern Europe, and have generally generated stronger median returns.7
In Europe, country and regional specialists often encounter diminishing returns when their funds exceed a certain size (typically €1.0 billion‒1.5 billion, depending on the specific region). These managers are therefore forced to expand geographically, often experiencing return degradation as they enter new markets. The exceptions—those who continue to outperform as they scale—tend to be sector specialists or those focused on three sectors or fewer (Figure 7). We find that these specialists overwhelmingly target Technology or Healthcare. Companies in these sectors often generate international revenue streams earlier than those in other sectors, and founders and management teams are more likely to prefer partners with specialized expertise to help scale their businesses. This contrasts with generalists in the competitive European Middle Market, which tend to face greater challenges in maintaining performance.
Conclusion
For LPs without dedicated in-house resources, covering the European SMBO funds universe can prove challenging, often leading them to default to well-known, pan-European managers. In recent years, particularly leading up to 2022, many LPs gravitated toward larger European buyout funds owing to their track records of success. However, the attraction of many of these managers has been diminishing.
Our analysis shows that while large-market managers have historically delivered strong returns, most of the top-performing names in recent years have emerged from the Small to Middle Market. Sustaining performance in the Large Market may prove challenging in the near-to-medium-term because of evolving market dynamics. We encourage investors to consider SMBO exposure to enhance portfolio resilience and diversification.
Our approach to outperformance in Europe hinges on nuance and precision—overweighting specific geographical, sector, size or thematic exposures to capture outsize returns. Achieving this requires discipline and adaptability, especially in a market where successful funds often expand beyond their “sweet spot” through fund size increases, ultimately entering the more competitive or undifferentiated Middle or Large Market.
With our local team and entrenched networks across Europe, we are well positioned to navigate these challenges and continue to deliver outperformance for our investors.
