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December 22, 2023

Clouds part for the small and mid-cap segment

After a dismal 2022 due to its historic underperformance against large caps, the small and mid-cap asset class will have had another tough year in 2023, weighed down yet again by interest rate hikes and massive outflows.

Only in November did the clouds begin to part for this segment. The change was signalled by the release of economic data indicating that inflation is slowing – leading central banks to consider a monetary policy easing in 2024 – as well as by the first month of positive net inflows, in November, since the start of the year.

It seems that clear skies are finally ahead for a rebound of small caps, and takeover bids may further boost the catch-up of this asset class in terms of valuation. Two such deals were recorded on December 12th and 14th, having an expected positive impact on our Sycomore Sélection PME fund. First, the founder of SII, Bernard Huvé – with the group’s executives and the support of Blackstone – launched a simplified public tender offer on shares of his own company, possibly to be followed by a squeeze-out. The offer of €70 per share represents a premium of more than 30% above the last closing price. Two days later, Michael Fribourg, CEO of Chargeurs, also announced a takeover bid for his company at a premium of 34%.

Despite several similar deals in 2023 involving our funds’ investments (such as Manutan, Boiron, and Somfy), the transaction volume for listed companies remained low for the year, reflecting the same subdued M&A activity as in 2022. However, reported premiums on deals will have hit a record-breaking average of 43%. With average premiums oscillating between 18% and 43% since 1996, this is evidence of the current undervaluation of the small and mid-cap segment.

The backdrop now appears conducive to an increase in M&A dealmaking. Companies’ financing or refinancing fears are gradually fading with the expected pivot of the central banks. This may prompt companies to pursue external growth more actively, especially since they can take advantage of particularly attractive acquisition multiples. According to the Argos index, the purchase price of SMEs fell to 9.1x operating income in the third quarter, back in the lower end of the range observed over the last decade.

 Private equity funds, which are already active in the above arena, may continue to carry out acquisitions among listed companies. Although traditionally valued at a premium over less transparent, less liquid private companies, today, listed companies are priced similarly to unlisted players and therefore look especially appealing by comparison. According to a study by BlackRock, with more than $4tn ready to be deployed, the private equity industry has enough dry powder to buy out every listed company in the UK. That should liven up activity for investment banks in 2024!

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Clouds part for the small and mid-cap segment

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