The impact of EMs on European family businesses

By Marc St John Webb, Philip Best fund managers at Quaero Capital

The Quaero Small Cap team has had a busy and engaging quarter, meeting more than 100 family-run companies around Europe since the end of summer.

While others are scrutinising utilities, banks and biotech firms, we like to focus on second-tier ‘Mittelstand’-type enterprises, which may be small cap but are enhanced and protected by diverse revenue sources: typically we find one third of sales are domestic, one third are regional (Europe) and one third international (global).

That focus means that although we always invest from the ground up, we are alert to wider macro-economic influences.

In recent months one of the most noticeable has been the impact of the slowdown in emerging markets on our family-run companies. Three we hold have been negatively affected: Manz Automation, Draegerwerk and Wacker Neuson.

Manz AG makes components such as displays, lithium batteries, printed circuit boards and solar cells for the high tech sector. It is still controlled and managed by its charismatic founder Dieter Manz, who is personally responsible for winning contracts through his top-level contacts at companies like Apple and Tesla.

The business has been a strong performer for us, but typically demonstrates more volatility than other multi-generational family-owned firms. Manz himself is a dynamic first generation entrepreneur who has created family wealth through measured risk-taking. (We’ll talk more about the impact of ‘ownership maturity’ on risk-taking in a future post).

But the present business tends to be ‘lumpy’ and recent order delays in Asia have prompted a profit warning which will lead to operating losses and restructuring charges. We took profits on part of our Manz holding earlier this year, but we’ll meet management soon to re-assess the situation.

Draegerwerk, the Dräger family’s medical and safety equipment manufacturer has also been hit by lower sales in Asia and particularly China, and the US, where it needed higher sales to offset one-off costs and increased spending on R&D. A last quarter loss puts growth and profitability targets out of reach.

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