Stuck in the middle? Mid-market ‘well-supported’ as big and small ends struggle

Fast-growing software firms are struggling to raise financing, while mature technology businesses are doing better.

Good morning Eurohubsters, Craig McGlashan here with the first Dealflow of the week.

It’s no secret that credit conditions are tightening across much of the world, as central banks raise interest rates to combat rampant inflation. But this trend is having different impacts across the private equity investment spectrum, one investment banker told me – something that’s reflected in some of the deals we’ve seen over the last few days.

Too big? Will fail. The large investment banks don’t want to lend for big M&A deals as they already have bonds stuck in their inventory that they can’t shift to end investors and don’t want to add more, the investment banker explained. While that is putting a brake on jumbo-sized deals, “the mid-market is still well supported”, he told me.

We’ve certainly been seeing plenty mid-market deals of late.

Gilde Healthcare’s private equity business invests in European lower mid-market healthcare companies. It announced its intention to buy Sanquin Reagents, a producer and seller of blood group and immune system reagents, in late August, and we found out a little more about Gilde’s plans for the firm this morning.

The private equity firm has cash to bring to help the firm grow, partner Hugo de Bruin told PE Hub Europes Nina Lindholm.

“We have plenty of funds available to build this out, invest in new equipment and further scale it up,” de Bruin said.

Amsterdam-based Sanquin Reagents operates in the field of haematology and immunology reagents, supplying tests to laboratories for medical diagnostics and research.

SHS built out Sanquin Reagents in the past five years to a level where de Bruin said it needs more investment to scale up. “It’s a setting in which there are a few customers that have worldwide coverage, and they want to do a lot more with these reagents,” he said. “It’s for us now to build out these commercial relationships and build out their production facilities because that’s the main driver of the growth case.”

Gilde’s investment will support the growth of Sanquin Reagent’s research team, building on its specialist knowledge, and boost the production of diagnostic tests.

When it comes time to sell Sanquin Reagents, Utrecht-based Gilde is confident of finding buyers. While 75 percent of Gilde’s deals are proprietary, according to de Bruin, on the Sanquin deal it had to beat several bidders in strategic and financial terms. De Bruin expects the interest, including cross border, to increase as the company grows.

You can read the whole interview with de Bruin here.

Maturity. On the subject of growth, the investment banker also told me that in the tech sector, too much growth may not be a good thing right now.

Fast-growing software firms are struggling to raise financing, he said, while mature technology businesses – such IT services and data centres – are doing better, even though energy-hungry data centres are faced with the headwind of rocketing electricity prices.

One private equity company looking to grow its technology footprint is Main Capital Partners, which is headquartered in The Hague but has just announced plans to expand in Belgium.

PE Hub Europe’s David Wansboro writes that the firm said its new office in Antwerp would strengthen its position as a strategic software investor in the Benelux region.

“Since the foundation of Main, we have invested in more than 100 software companies,” said Pieter van Bodegraven, managing partner Benelux at Main. “However, the Belgian market remained underexposed for us, but also in this market we see beautiful and innovative software companies that fit well with our investment criteria. By opening an office in Antwerp, we now want to change this through local presence and targeted focus. We are already in contact with various parties and expect to realise our first investment in Belgium in the short term.”

Getting real. Finally, we’ve written a lot lately about how some funds are finding it trickier to exit deals, with financing conditions getting trickier and valuations being harder to hammer down.

On Saturday, the Financial Times reported that BC Partners and Pollen Street Capital had put plans for the sale of UK challenger bank Shawbrook on hold after failing to attract bids matching their £2 billion ($2.3 billion; €2.3 billion) target.

But despite that, the investment banker I spoke to said pricing expectations for exits were generally becoming “a bit more realistic”.

One of the most recent exits we’ve seen was Equistone selling its majority stake in the Organisation for Refugee Services (ORS) late last week to Serco Group, an international governmental service provider.

ORS is headquartered in Zurich and offers immigration services with a focus on public customers and governments in Switzerland, Germany, Austria and Italy.

London-based Equistone operates across the Benelux, France, Germany, Switzerland and the UK.

Serco Group is headquartered in Hook, England.

That’s it from me – speak to you on Tuesday.