Podcast: executive sessions – equity abroad
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On MiddleGound’s sixth episode of Executive Sessions, Clayton Gullett leads discussions with MiddleGround Founding Partner, John Stewart, Managing Director of our European Transaction Team, Alex Van Der Have, and Head of EU Business Development, Anthony Denaix. This episode covers:
- Considerations of European Expansion
- The Importance of Hiring Locally
- Differences in strategy between the US/EU
- Challenging Economic Environments
Considerations of European Expansion
In January of 2023, we expanded our firm to Amsterdam, Netherlands. Expanding into the European market was a complicated endeavor, it’s not as simple as renting an office space, shipping employees over, and copy-pasting your existing strategies! Such expansions involve taking on a certain level of risk and we did extensive research to mitigate that risk. When starting a business in another country (and in this case another continent), a deep understanding of how the local economy works is critical to success. With its own cycles, legal processes/systems, and a totally unique liquidity environment the European manufacturing and private equity environments are completely different than the U.S.
The process of expanding into Europe was a long journey that required extensive research, clear structure, and plenty of communication with existing investors; we employed a third party to help us take these steps. They helped us fully understand the European landscape, zero in on how our strategy would need to adapt to suit different markets, as well as determining the best location for our firm’s European operations. One of the largest questions we asked ourselves when undergoing this expansion was where to build a presence in Europe. Amsterdam is within earshot of many industrial manufacturing hubs and boasts strong talent along with a business-friendly transaction environment. Aside from business-related benefits, Amsterdam has a strong focus on holistic well-being, making it a perfect fit for MiddleGround’s culture.
The Importance of Hiring Locally
Diversity is a key part of our success. The same concept we use with our portfolio companies, aligning their workplace environment with the surrounding communities, served as a blueprint when expanding into the European market. Though an American firm with American DNA, we were compelled to establish our new office under the guidance of European professionals and even elected to carefully recruit trusted, talented EU nationals to establish our office rather than bringing talent from our US-based offices. And we ensure that our EU leaders have decision-making power over our European operations.
Cultural practices and nuances in Europe are unique from those in the U.S. and the ability to bring a German native to a meeting with a German company can help foster trust and rapport between us and our clients. A diverse team consisting of 10+ nationalities speaking 12+ languages helps bridge the gap between the varied cultures across the continent.
Differences in Strategy between the US/EU
In the United States, businesses are larger in scale and revenue, but in Europe, companies in the middle market are often smaller due to regional focus. Since many of these businesses are focused geographically, we strive to find those who have truly differentiated offerings in the market and are working to create a lasting impact via meaningful investment in R&D for example. However, it is also key to focus on industries that have a growth rate faster than the rest of the market. If you invest in a top-of-the-line business in a declining industry, it ultimately may fall prey to macro trends.
Beyond that, there also needs to be a cultural fit. If a company we’re reviewing doesn’t express an interest in operational improvement and isn’t represented by leadership that gels with our own, they won’t be likely to take advantage of the operational expertise that we offer and therefore will not improve.
Overall, we refrain from assuming European companies will solely operate our way. We instead create a level of comfortability and trust that allows us to work together on the best course of action.
Challenging Economic Environments
With everything going on in the world today, there are bound to be disruptions in any market, but with our operational expertise, we are equipped to help our partner companies navigate harsh environments. Whether it’s the rising inflationary rates that create bigger gaps in valuation between owners and buyers or uncertainty around the Ukraine war, it’s essential to stay in tune with local economic shifts. One example is the energy crisis. The European Union was 40% dependent on Russian gas and coal, and by cutting that tap in support of Ukraine, there have been obvious disruptions in the way businesses operate as the price of energy goes up significantly and impacts the bottom line, requiring a shift in the operation models. While the Ukraine war might not be directly destroying manufacturing facilities in Germany, it’s still managed to destabilize the entire EU energy market and cause hundreds of other ripple effects.
That said, it is imperative that we consistently provide returns to our investors and every market has its challenges, there’s never an excuse not to perform. Even the lack of liquidity available and the high cost of capital, which caused challenges when buying companies, can have its benefits. You can use that as an advantage and get a good deal by using a higher proportion of liquidity to drive down prices. Especially if you carefully structure transactions.