Alantra's partner and QMC PM, Julián Cepeda
The Spanish asset management arm of the global investment firm Alantra focuses on Iberia-listed small and medium companies, seeking high quality assets with potential for incremental value.
Lack of arbitrage, weak broker coverage of companies, and a profusion of high-quality assets with global exposure make Iberia (Spain and Portugal) one of the most fertile hunting grounds within the European small and mid-caps universe. So firmly believes the asset management division of Alantra, a global investment banking and asset management firm that focuses on the midmarket.
Headquartered in Spain but with offices across Europe, the US, Latin America and Asia, the company provides independent advice on M&A, debt advisory, financial restructuring, credit portfolio and capital markets transactions.
Iberia is the most fertile ground for active ownership strategy in small & mid-caps within Europe, due to the lack of arbitrage and weak broker coverage of companies.”
In asset management, Alantra offers its clients access to a broad offering of investment strategies that range from direct investments to fund of funds, co-investments, and secondaries. It does so across six asset classes: private equity; active funds; private debt; infrastructure; real estate; and private wealth management.
THE QMC FUNDS RANGE
The QMC range of funds is part of Alantra's asset management division. It is made up of two differentiated strategies and management teams: the pan-European EQMC Fund, an open-end equity strategy that invests in the European midmarket universe; and the Iberian Small & Mid Cap strategy, also an equity fund, currently in the fundraising process of its third version, investing in small and mid-caps too but just from Iberia.
The QMC family focuses on concentrated portfolios, from 10 to 12 holdings, of high quality companies from the midmarket space. Funds from the range actively work with management teams and the companies' shareholders in order to enhance and accelerate value by driving changes constructively through a very ample toolkit of initiatives.
SMALL - AND MID-CAP IBERIAN STRATEGY
QMC III, which is the Iberian Small & Mid Cap fund, is now involved in the fundraising process of its third vehicle and unlike its predecessors but like its sister pan-European fund, is an open-end strategy.
The fund was launched in October 2017 and aims at achieving €300m in assets under management, of which it had reached a third as of the 9 of July fed mostly by the re-ups of its preceding vehicle, the QMC II.
Managed by Alantra's partner and QMC portfolio manager Julián Cepeda, the fund had in July 10 holdings in its portfolio. According to Cepeda, the fund has been outperforming its reference index (IBEX MC) since day one, as its precedent funds did, while being consistently within the top percentile of return in comparison with its Iberian fund peers.
The Fund seeks to maximise returns by managing a concentrated portfolio of 10-12 companies, supporting value creation constructively and promoting a very ample toolkit in the active ownership agenda (strategic and operational focus, financial optimisation, corporate governance and communication improvements).
The fund's management team believes that there is a structural opportunity in Iberia of buying "bullet-proof" high quality assets with potential for incremental value and listed at reasonable multiples.
Cepeda says: "Iberia is the most fertile hunting ground for active ownership strategy in Small & Mid-caps within Europe, due to the lack of arbitrage and weak broker coverage of companies and the profusion of high-quality assets with global exposure."
The launch of the QMC III followed the divestment process of the QMC II, the firm's previous version of its Iberian strategy, which reached a net IRR of c.16% during its life time. The QMC II, also managed by Cepeda, invested also in a concentrated portfolio of Iberian companies, including some of the top performers of the Iberian Small & Mid Cap universe, such as CIE Automotive, Fluidra and Laboratorios Rovi.
The first version of the QMC Iberian Fund, the QMC I, was launched in 2003 with the idea of applying a private equity approach to the universe of small and medium listed companies in the countries of Spain and Portugal.
INVESTMENT PHILOSOPHY
QMC III retains the same investment philosophy than the whole range of funds of the QMC family, which consists of taking significant minority stakes in small and medium companies with high asset quality, strong management, large growth potential, global leadership in niche markets, and solid financial muscle.
Through a highly disciplined, thorough and well documented investment process, the fund actively works with management teams and shareholders, a strategy to which they refer as active ownership. The company says it is an unique approach that sets them apart from their peers and which aims at enhancing and accelerating value in companies by driving changes constructively through a very ample toolkit of initiatives.
By combining its 16 years of experience in identifying local fully-tested "bullet-proof" assets and its know-how in promoting shareholder value creation opportunities, QMC III Fund aims to deliver outstanding long-term real returns, largely de-correlated from indexes.
The active ownership means helping the companies from within. When creating this value, Alantra focuses on five key areas:
- Corporate development: consists on encouraging sector build-up and/or divest non-core activities.
- Financial discipline : QMC III management team likes companies that grow avoiding dilution of ROCE for shareholders.
- Balance optimisation: helping companies to optimize their capital structure along time and to seek access to required funding sources.
- Capital markets: advice on how to improve stockmarket liquidity, help orderly exit of traditional shareholders, improve coverage and Investor relation communication. Corporate governance: provide shareholding long-term stability to allow CEOs to focus on long-term business strategy, improve ESG, align interest of companies' managers and minority shareholders, etc.
Cepeda explains: "Active ownership is a strategy, not activism. We have a constructive approach in which we enter the companies through the front door and leave them through the same door.
We always establish productive relationships with the companies we invest in. We do not have competitors in the Iberian market applying this active ownership strategy.
"Eventually, board of directors representation of holding companies helps to maximize returns and/or to supervise execution risks," he concludes.
When asked by the fund's investor profile, Cepeda says that investors of the QMC III share a long-term view because they understand that the greatest virtue of this strategy is the creation of added value. European and Spanish family offices and pension funds, among other institutional clients are the fund's primary investors.
FOCUS ON "GLOBAL LEADERS"
Before making a "core" investment in any of the 10 to 12 holdings of its concentrated portfolio, the management team carries out a thorough analysis of each "seed" positions for a period of between one year and year and a half. After that time, they select the "core" holdings on which invest in the long-run, and take a relevant minority stake that normally ranges from 5% up to 25%, depending on the company's size. Although the stake percentage changes on each case, it will never do it getting to situations on which there is need to launch an initial public offering (IPO), explains the fund manager. Companies making up the portfolio normally have a size of between €100m to €3bn.
The firm first analyses the companies' track record looking at their figures after periods of economic crisis. Return on capital employed is a financial ratio they particularly look at when comparing profitability across different businesses.
The average time Alantra stays invested in the companies that form its portfolios is five years and every year, there is a portfolio rotation of approximately two positions.
The company particularly likes what they call global leaders, which would be referring to companies from Spain and Portugal that have 85% of their business activities abroad.
"When selecting stocks, we just invest in assets of very high quality. We first invest in global leaders acting in specific market niches that are normally undervalued for being listed in Iberian markets," Cepeda explains.
"An example of this takes place in the Portuguese small and mid-cap market, which is the worst covered in Europe, partly due to the limited liquidity of its assets," he adds.
