European small caps can outperform, says Alantra EQMC Fund manager

A European investment boom could help the continent's share markets outperform global peers over the next couple of years, as corporate profit growth accelerates and money rotates into small-cap stocks.

The Alantra EQMC Fund aims to capitalise on this trend by managing a concentrated portfolio of around 15 pan-European small-cap businesses, with market caps typically in a range between €500 million and €1 billion. 

The fund's manager and chief investment officer, Francisco De Juan, says the concentrated strategy resembles private equity in public markets, as the fund takes stakes in high-quality companies with significant growth potential. 

"Risk comes from not knowing what you're doing," says De Juan. 

"Concentration in quality companies that you know well gives you a good trade-off on risk and upside. If you diversify too much, then how can you add value?"

Defining Quality in Small-Cap Companies

When it comes to small-cap stock picking, De Juan says the Alantra EQMC Fund takes a disciplined and repeatable approach to help it identify businesses likely to make money for investors. 

"We need to see a good track record of earnings growth, strong cash flow generation, and good return on capital," he says. "A strong and unique product or service with a clear competitive advantage and a robust moat to protect against competition. 

"We also want to see the company has an ability to generate structural growth, with pricing power to protect against inflation and barriers to entry", says De Juan

"And we want to see that a company has a prudent capital structure that can withstand economic cycles, as the world is uncertain."

Successful investments, active ownership and value creation

The fund's focus on fewer high-quality companies means it can engage deeply with the businesses and their management teams, helping them improve and create value, according to De Juan.

This strategy is part of its "friendly activism" mantra where it seeks to help management teams at companies it owns to improve operating performance and shareholder returns.

The "friendly activism" approach is more around collaboration, than the confrontation of some activist funds, says De Juan. 

"Our active engagement is based on a few simple concepts," he says. 

"Respect, win-win thinking, and emotional intelligence. The aim is to work constructively with management to help companies grow and create value, rather than forcing drastic changes that could be disruptive."

The fund can also profit from owning companies that are the likely candidates of takeover bids or other merger and acquisition activity. 

De Juan says the small-cap end of the market offers rich pickings for this kind of activity and the fund often invests in companies it thinks are likely to catch takeover bids from trade buyers or private equity firms. 

"So it's about picking the right asset, understanding the stakeholder situation in the industry in which we operate and understanding the private equity landscape," he says. 

"We try to buy companies that do something that few others can."

Share market winners

De Juan highlights two investments as examples of the fund's strategies in action, including around engaging companies and driving value creation.

One example is Spanish business CIE Automotive, an automotive parts supplier that the fund has owned for over ten years.

De Juan says the company grew from a small-cap to a mid-cap over this period, driven by operational improvements, cost efficiencies, and strategic acquisitions. 

"It’s been a great operational journey. Through their investment, the company expanded its global footprint, adding capacity in regions like Brazil, Mexico, India, China and Eastern Europe," he says. 

Another example is Alimak Group. The Stockholm-listed, Swedish company produces elevated platforms for construction sites, petrochemical plants, and wind farms. 

De Juan says the fund helped Alimak acquire a competitor from private equity, which added cost savings and boosted the company’s market position. 

"This created a lot of industrial synergies and increased the company's relevance. Over time and helped Alimak grow from a €500 million company to a €1.5 billion company, gaining recognition as a global leader in its sector."

Outlook for European shares

Since its inception in January 2010 the fund has returned a compound 10.4% per year net of fees, versus an 8.2% return for the Euro Stoxx 50 Index over the same period. 

To start 2025, Europe's flagship Stoxx Europe 600 Index has advanced 7%, versus an 8% fall for the US Nasdaq 100 Index. 

De Juan thinks the outperformance of European shares in 2025 can extend into the years ahead as the dominance of US markets weakens and pessimism around Europe unwinds. 

He also expects Europe's 2025 rally to broaden out to its small-caps sector as the lower valuation multiple valuations of smaller companies starts to close the gap on their larger peers. 

"In the last two or three years, when interest rates picked up so much, small-caps went from a valuation premium to a discount," says De Juan.  

"Historically, European small-caps traded at a 15% premium over large-caps, but this has flipped to a discount in the past few years due to economic and geopolitical instability."

The fund manager added that small caps should start to attract a valuation premium again as Europe's outlook now includes an ongoing interest rate cutting cycle and cooling inflation. 

The exact timing of the rebound is unclear, but De Juan says he's in no doubt that it will come soon enough. 

"The discount [small caps trade at] cannot be forever," he says. "History tells you that small-cap valuations will recover once inflation and interest rates stabilise. The small caps are trading at 12.5 times earnings compared to large caps at around 14 times. 

"But typically European small caps have traded at price-to-earnings of 16 times and as interest rates come down I think we'll see a nice shift from large caps to small caps."

As to the trade and tariff wars currently rattling markets, De Juan says the tensions are unlikely to persist long-term because US President Trump will be forced to adjust policy.

"Tariffs will not help, and our view is that this pressure is temporary. We just need to get through this period," he says. 

In total, the Alantra EQMC Fund has around 15 investment professionals working on it with various backgrounds and specialisations and is only open to wholesale or sophisticated investors. The broader Alantra Group has around €16.8 billion in total assets under management and €2.2 billion in direct investments.