Standard Life Investments

Published Article

Undiscovered gems in European Smaller Companies: Success of the German Mittelstand


One of the joys of being a fund manager within the European Smaller Companies market is the large number of differing business that is available to invest in. The European smaller companies funds at Standard Life Investments adopt a concentrated bottom-up stock picking approach, looking for the best 40 -50 undiscovered gems within a universe of over 900 stocks. Our process has identified a number of German Mittelstand businesses as potentially very interesting long-term investments.

German Mittelstand businesses are small and medium sized enterprises that often exhibit a number of similar characteristics which have proven to be highly successful over the medium to long-term. Firstly, the founders of the business retain an involvement both in terms of a significant shareholding but also in some kind of management capacity. This provides several benefits including stability of management, consistency of strategy and execution, and economic alignment of management and external shareholders. Secondly, the business will typically have a clear product and market focus which allows the business to excel in a particular area. These factors mean the business usually has a world-class product which can be sold both domestically and also, importantly, across the globe. Finally the existence of a substantial long-term shareholder helps management to resist short-termism but instead make investment decisions for the long-term benefit of the business.

One Mittelstand business in which we invest is Nemetschek. The business was founded in 1963 by Professor Georg Nemetschek. He recognised the potential use of software within the architecture, engineering and construction industries. In particular the use of so called building information modelling enables the transfer of building-relevant information through all stages of the creation of the building and its operation. This reduces the scope for costly errors, improves functional quality and on-time delivery. The business has become a global leader in a market which should see strong growth for a number of years. Professor Nemetschek retains involvement in the business as deputy Chairman of the supervisory board and has a substantial shareholding ensuring significant alignment of management and external shareholders.

There are many similar examples of German Mittelstand companies with similar characteristics which we believe make excellent long-term investments.

Bull points

  • Alignment between management and shareholders
  • Focused product and business strategy
  • World beating products
  • Long-term investment horizon

Bear points

  • Share liquidity often tight
  • Risk of not being sufficiently open to change
  • Exposure to currency fluctuations given export exposure

Andrew Paisley, Investment Director European Smaller Companies, Standard Life Investments

First published in Investment Week 19th April 2016