Merrill Corporation recently hosted a dynamic global webinar that explored private equity in the German mid-market. It sparked a lively discussion among our esteemed panel of experts, including Christoph D. Kauter, Founding and Managing Partner at Beyond Capital Partners; Dr Rainer Traugott, Partner, Latham & Watkins; and Nick Money-Kyrle, Founder and Managing Partner for Steadfast Capital.
At the centre of our exchange were the tumultuous events surrounding the Brexit vote, the election of Donald Trump and the forthcoming elections in France and the UK. These all combine for an uncertain spectre hanging over the private equity market in general -- but according to our panel, it could also create unique opportunities in Germany. What follows are some highlights from our conversation.
- Dr. Traugott predicted that Germany will become more attractive compared to other jurisdictions in light of the geopolitical turbulence, saying “There are large funds around that need to be invested, and I expect activity in Germany to increase.” However, he also warned of increased competition, noting that there were questions as to whether the German market would be able to produce a sufficient number of really attractive targets to cater for the increased demand.
- Panel discussion revealed that levels of competition in the upper end of the German midmarket are already high for private equity players. Trade buyers have become more sophisticated in their approach, often with in-house M&A teams. According to statistics quoted from Merrill's partner, Mergermarket, deal activity in the German market peaked in 2016, with a record €73.94bn worth of transactions taking place – a sum not seen since the financial crisis.
- At the same time, private equity houses bidding for large companies within the German mid-market look set to see less competition from Chinese strategic buyers in the months to come. Traugott mooted that the introduction of regulation monitoring the outflow of capital from China into the western world would bring about more hurdles for Chinese bidders. “Sellers will want deal certainty and there will be question marks as to whether a deal with a Chinese bidder would be cleared. Competition should be less of an issue for private equity buyers in months to come,” he said. Until recently, market activity in Germany has been dominated by Chinese buyers, who have bid quite highly thanks to cheap financing coming out of China.
- Our panelists were unanimous that deal opportunities remain rife for private equity players in the lower spectrum of the market. “It’s easier to find SME sellers who have a preference for a private equity buyer rather than a trade buyer, to continue their legacy rather than being absorbed into a larger corporate,” noted Traugott. Money-Kyrle additionally noted that at the smaller end of the market, it is easier for private equity to avoid auction processes and thus buy at good prices.
- Lack of stability following Britain’s decision to leave the European Union could prove a sticking point regarding private equity fund structuring, according to our panel. “LPs do not want Guernsey or offshore structures, and when it comes to German funds they are not interested in Scottish Limited Partnerships. They need to be onshore and on the continent. This will have a wide impact across the industry — especially in the short-term,” said Money-Kyrle, who is currently in fundraising mode.
- Panellists remained positive about the outlook for private equity activity within the German market. “It is a good time for private equity. New private equity sponsors are pushing in from the UK to Germany, showing it is a good, competitive environment,” noted Kauter.
- Traugott added a final note of warning that although private equity, in general, is not under threat in Germany, certain players may feel under threat because of the increased market competition currently seen. “There is the risk that people will overpay and not exit at the correct return multiples, so investors will compare returns and vote at the next fundraising who is going to stay in the market and who might no longer be a relevant player.”
As you can see, we covered a broad range of topics within this webinar, sparking a great deal of discussion and thought around what the opportunities are going to be in both the near and distant future. If you'd like to hear the full discussion, I encourage you to listen to the full webinar playback here. Additional commentary can be found in our roundtable report and in an exclusive Q&A with Christoph D. Kauter.