Europe’s big secret is its small cap superstars
Contrary to popular belief, not all of the world’s fastest-growing companies are American
Conventional wisdom has it that Europe is a perennial laggard in building exciting companies that can rival the global success stories of the United States.
While venture capital investing has grown significantly in the continent over the past decade, the European start-up sector remains minuscule compared to the might on show in North America.
The malaise also extends to Europe’s listed companies. For more than a decade, European stock indices have significantly lagged behind the US. A quick glance across the European members of the Fortune 500 show the vast majority were founded before the second world war — think solid, boring, and slow growth.
With so much focus on trying to discover racy European private start-ups many observers have failed to spot that some of the fastest-growing and best-performing small companies in the world have in fact been surging ahead right under their noses — and not all of them are new.
Alta Fox, a fund management group based in Texas, last year published an analysis of the best performing small listed companies in the developed world over the five years from 2015-20.
The stock-screen covered companies in North America, western Europe and Australia that started with a market capitalisation between $150m and $10bn, and had generated a total shareholder return of at least 350 per cent over the five year period (35 per cent a year compounded).
Alta Fox excluded all companies in the energy, materials and financials sectors, and as a final check, required companies to have positive revenue growth and earnings before taxation, interest and depreciation for the previous 12 months.
Its findings of the study run against significant amounts of received wisdom about the dire lack of fast-growing companies in Europe compared to the US.
Of the 104 companies to make the final cut, those in western Europe made up 55.7 per cent of the total compared to 32.7 per cent in North America, with Australia accounting for the rest.
Some of these once tiny European listed companies — many of which you may never have heard of — generated annual returns that would trounce top venture capital funds. Xilam, a French-listed animation studio that produces content for Netflix and Amazon was up 1,678 per cent over the period, and Vow ASA, a Norwegian company that purifies waste for cruise ships rose by 1,244 per cent.
Others were microcap shares with no investment bank analyst coverage that were probably worth less than a banker’s house at the start of the study.
Endor, a Bavarian gaming accessory company that makes high end racing simulation racing gear, had a market cap of €1.85m in 2015 but generated a total shareholder return (TSR) of 8,217 per cent over five years. Today, it is worth €352m.
Others will be better known to readers. Some are not new at all, such as the UK miniature war-games company Games Workshop, founded 46 years ago, which grew from £160m to £2.5bn in the period, making returns of more than 2,000 per cent for its investors.
Online fashion retailer Boohoo generated a TSR of 1,320 per cent. Other UK Aim-quoted companies on the list included Bioventix, a biotechnology company based in Surrey, Ideagen, which produces compliance software, and UK polling company YouGov.
Given the obsession with tech as the only source of growth, it’s striking that many of these small companies had little to do with anything that would immediately interest most VC investors.
While companies in the technology sector made up 34 per cent of the total, about a fifth were classed as consumer discretionary companies, and 13 per cent were in the industrial sector. AB Dynamics, listed in the UK and based in Bradford-on-Avon, makes automotive testing equipment. In 2015 it was worth £40m, yet has raced up to £418m today.
As for the country breakdown, the US made up 28.8 per cent of the set Alta Fox studies, with the UK in second place with 15.4 per cent and Sweden in third place with 12.5 per cent. Germany, France, Norway, Denmark, Austria and Ireland all had entrants. However no companies were featured from Italy, Spain or Switzerland.
There should be some lessons in this. By fetishising venture capital and start-ups, both investors and policymakers risk missing that Europe already has an extremely healthy record for small, profitable companies that grow into much larger successful ones. To find them, however, requires looking a little bit harder.