We can understand why investors are cautious about investing in Europe. Economic growth is uninspiring; its politicians even more so.
Europe lacks a technology giant, such as Amazon or Google, and its lacklustre stock market is dominated by large, bureaucratic multinational companies in sectors such as financials, consumer staples and even healthcare.
But investors distracted by the broader economic or political landscape will miss the incredible companies that can deliver outstanding growth over the next five to 10 years.
- Europe lacks a tech giant.
- Many promising companies in Europe are niche, smaller-cap companies.
- Europe has many heritage brands.
Many such businesses lie in the smaller-cap end of the market, broadening the opportunity set in the listed sphere to around 1,150 companies.
Europe is home to many outstanding businesses: from ‘hidden champions’ – industrial companies dominating attractive niches thanks to a dedication to product and service quality – to luxury brand businesses that benefit from heritage and provenance, and younger, disruptive, internet-enabled businesses.
Looking at the market over the past 30 years, it is niche industrial businesses that have delivered the best returns.
These are companies such as ASML, whose lithography systems allow light to be projected through patterns to make blueprints for manufacturing semi-conductor chips, or Beijer Ref, whose environmentally-friendly fridges and freezers are playing a key role in reducing CO2 emissions in supermarkets and other commercial premises.
Some of the most exceptional opportunities can be found among European companies that are unlisted.
These are not embryonic businesses or ideas, but established companies choosing to remain private for longer.
Businesses like these tend to be asset-light and do not require much capital, while owners often find it is easier to create long-term value without short-term shareholders.
So far, only around 10 per cent of the world’s unicorns — private companies valued at more than $1bn (£791m) – have come from Europe, so it still has some catching up to do. Yet when we speak to companies in Berlin and Stockholm, we can see the mindset is changing.
A global outlook
The internet has made it much easier for smaller companies. The old theory that economies of scale are most important no longer holds. IMCD is a good example of a capital-light business, and has been run by the same chief executive officer and chief financial officer since it was set up in 1995.
A Dutch company, it markets and distributes speciality chemicals, which are used in cosmetics, food, drink, cars, detergents, paints and medication. As more chemical companies are outsourcing distribution, it operates in a growing market.
However, to describe IMCD as a European business would be misleading. IMCD is very much a global business, which has made several acquisitions in the US, where it has full national coverage.
We have noticed something similar when we compare Swedish engineering businesses, such as Atlas Copco or Alfa Laval, with their German or US equivalents.
The Swedish businesses, with small domestic markets, had to leave their home markets in order to grow and develop international skills and a more adaptable culture. This now means they can say, “We’ve been in China for decades”,an increasingly valuable advantage as markets in China, India and Latin America become more important.