Interview with Professor Reiner Braun, Chair of Entrepreneurial Finance at the TUM School of Management, Technical University of Munich (March 2020)

“The Argos Index® sheds light on a market sector that is notoriously opaque and under-researched, with a lot of potential to be unlocked”


The Argos Index® for Q1 2020 included just a few weeks of the corona virus health crisis, but the trend in the findings is clear: reduced business volume since Q3 is putting downward pressure on valuations and therefore also on prices. Investors are still there, but they’re waiting for a bit more visibility before investing. Professor Reiner Braun, Chair of Entrepreneurial Finance at the TUM School of Management, Technical University of Munich, explains his outlook for the mid-market unlisted sector, considering the current unforeseen events as the Covid-19 health crisis spreads to the global economy.


What’s your opinion of the Argos Index®?

The Argos Index® sheds light on the mid-market that is notoriously opaque and under-researched yet is a major source of economic growth and innovation. This means we get much of our market insights from larger transactions – both public and private, often from the US – and that doesn’t provide a true global perspective. Because the Argos Index® covers 2-3 business cycles in its 6-month range, the information is reliable and really tells us something about long-term developments in the markets.


The Q1 Index shows a downward trend. How much of that do you attribute to the anticipated “market correction” and how much to the global shutdown of economic activity due to the coronavirus?

Well, that’s the key question. We lack experience in comparable situations. With the collapse of Lehman Brothers in 2008, we had a banking crisis. Today we have a crisis, but not a change in fundamentals. It’s an exogenous crisis. The dip in valuations may not be as pronounced as we might expect. There are still a lot of private equity investors out there with cash, looking for deals, but keeping their powder dry. The depth of drop – be it a market correction or more – will be determined within the next few weeks.
A big concern I have that will center the stage in the coming month is what the crisis could do to EU solidarity. We see the economic advantages of the EU, even with Brexit behind us, and these advantages must prevail over the populist movements we see across the continent threatening European unity and the Euro. I think this is rather unlikely to become a serious threat, but if it does it will result in major turbulences.


Is the Argos Index® a useful tool for the German market?

In my view, Private Equity in Europe, and in Germany in particular, has still not exploited its full potential. This applies to both sides of the equation: fund investors’ interest but also company’s willingness to consider LBOs as a financing option. However, smaller firms in Europe might show an increasing openness to work with a Private Equity sponsor. I still see huge future potential as these well-positioned SMEs are the backbone of Europe’s and Germany’s economy. So, yes, the Argos Index® is a very useful tool for the German market as it targets what I think is the “sweet spot” of the European industry.


How might you use the Argos Index® in your classes on entrepreneurial finance – for example, to estimate valuation levels?

The Argos Index® shows some attractive cases for investment in Europe. I teach Private Equity (PE) every year and most of the teaching examples available to me are from the US. So, Argos gives a broader perspective of world PE. It adds value, presents another, broader, perspective.


What impact will the Covid-19 crisis and associated shutdown have on M&A activity? How much more leverage can mid-sized companies take on to engage in M&A activity?

If I look at deal returns from previous crises, I see the average return on investment is pretty attractive. Apparently, some players are able to buy assets on the cheap. But, the variance of returns in these past times is high too, so investors should be aware of the risk they are taking when trying to ride the wave: ultimately, no one knows what situation will prevail.

On the buy side in the M&A markets, I think those with deep pockets and a strategic motive will be active once the fog of uncertainty lifts. All others might focus on reviewing and managing their portfolio before they become active in the market again.

As to leverage, recently we had seen many Private Equity deals with levels higher than 7x EBITDA. This is a significant debt burden and I hope that there is enough flexibility for the companies left in the current situation. But my own research suggests that mid-market companies tend to have less debt than large companies. Maybe this gives them financial flexibility to become active in the M&A market if they see an opportunity. But, again, I think they should be patient and not rush into M&As just because the price is low. Today, even with low prices, it’s wise to be patient rather than aggressive because there is uncertainty all around. It’s a good time to refrain from making any long-term, binding decisions without a really convincing rationale.


How low do you expect valuation levels to go in this sector? Below 2008-2009?

Again, it’s the uncertainty that’s the killer. But I see a fair chance that prices will not go below those we saw in 2008-2009.

In my view, there are two scenarios to consider here: the first, if this health crisis continues and we get a second Covid-19 wave and another major lockdown, I see significant challenges for economies around the globe and there’s NO WAY we don’t go below 2008-2009 levels. The second scenario is we see this correction and then a ramp up again in a U-shaped recovery. Obviously, the second scenario is preferable.


What does the Argos Index® suggest about the future for mid-market companies in Europe, which tend to be drivers of economic growth?

Well, I’d like the next Argos Index® to show valuations for this sector at reasonable levels; fewer deals obviously but more strategic ones. This would send a signal that the European mid-market sector is characterized by high-quality assets that trade at reasonable prices even in times when the market sentiment is rather negative.
Maybe another way to look at it is to think about companies or industries that might benefit from our experience with this pandemic. I certainly think that we will see interesting life sciences deals in the near future. What is more, we need a new view on supply chains – not just “Well, it’s cheaper to produce in China and it just takes two weeks for the goods to get here.” Now things like the resilience of supply chains are becoming more important and reshaping of supply chains could be an economic benefit. I guess that many European mid-market firms are well-positioned to seize this opportunity.

Interview with Éric de Montgolfier, Invest Europe CEO (Dec. 2019)

Argos-mid-market-index - Argos Wityu “The Argos Index® is an important benchmark for valuing unlisted European companies and is based on very reliable data.”


Based on your experience in various investment funds and as CEO of Invest Europe, how do you view the Argos Index®?

The Argos Index® has already been around for 15 years, and I admire its longevity. When I managed investment funds, I systematically consulted the Index as soon as it was published and I used it many times in meetings with investors. The Argos Index® is a market tool that provides a real service, and as it is based on very reliable data, it is an important benchmark for valuing unlisted mid-market companies in Europe. The quarterly Argos Index® publication reports price trends and provides a rational explanation thereof, which is essential.


What are the significant differences between the Argos Index® and the data produced by Invest Europe?

The information produced by the Argos Index® is different from ours. We are interested in investment, while the Index focuses on valuation. We cast the net very wide in the mapping of investments and can say very precisely where the money is coming from, where it will be invested and when. On the other hand, we have not developed the methodology that Argos Wityu and Epsilon have, to know who made the acquisition and at what price. The sample is also different. The Argos Index® focuses on the eurozone whereas we look at the whole continent of Europe. For this reason, the Argos Index® data are complementary to ours.


What is Invest Europe’s specificity and how does the Argos Index® complement the association’s other studies?

Invest Europe has been publishing data for several years in the areas of fundraising, investment and divestment. A few years ago, we joined forces with all the European private equity and venture capital associations to create a data collection platform called the European Data Cooperative (EDC). Using this single platform with a standardized methodology, we can obtain consistent and comparable half-year and full-year statistics across all of Europe. In this way, we can better inform our members, fund managers (GPs) or investors (LPs), policy-makers, regulators and other stakeholders.

We have a team of 15 professionals who collect this multitude of data before processing it. It’s a huge job, as is the work of Argos Wityu and Epsilon to establish the Index.

In sum, our methodologies have the same point of departure: the market values consolidated data.

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