German market is full of potential – roundtable

Recent mega-deals have electrified the German private equity market, but what’s next? Our panel of experts share their thoughts on what’s in store.

Meet the roundtable

Andreas Simon, Partner
Capvis Equity Partners

Simon is a partner and 11-year veteran at the Switzerland-based investment firm. The investment specialist joined from Siemens where he served as director, and his previous experience includes working in Credit Suisse’s investment banking division.

Mark Nicolson, Senior investment director – private equity, Aberdeen Standard Investments

Based in the Edinburgh office, Nicolson is responsible for primary deals, secondaries transactions and co-investments. The investment committee member joined the firm in 2007, following spells in the corporate finance teams of EY and KPMG.

Frank Amberg, Head of private equity and infrastructure, MEAG Munich Ergo Asset Management

Amberg’s previous roles as private equity fundraiser at WMAM Bank of New York Mellon and director at WestLB have given him extensive experience in direct and fund investing across private equity, venture capital and infrastructure, as well as M&A buying and selling.

Patricia Volhard, Partner, Debevoise & Plimpton

Volhard specialises in advising private funds on a range of regulatory issues and works in the law firm’s Frankfurt and London offices. She previously served as chairwoman of Invest Europe’s tax, legal & regulatory committee, and is the incumbent chairwoman of its financial services/regulatory working group. Volhard also sits on the legal committee of BVK, the German private equity association.

The European private equity industry typically takes July and August to draw breath and kick back. But in Germany last year, there was no respite. Bain Capital Private Equity and Cinven Partners kept the market awake with their acquisition of generic pharmaceutical company Stada Arzneimittel. At €5.4 billion, the deal, secured in mid-August, was the largest private equity-backed takeover of a Germany-listed company.

The Stada deal followed the acquisition of German metering and energy management business Ista by China’s CK Infrastructure for up to €4.5 billion in July. The seller, CVC Capital Partners, acquired the group in 2013 for €3.1 billion. The transactions signal a robust appetite for German private assets.

“It’s a sellside market,” says Andreas Simon of Switzerland-based Capvis Equity Partners, which invests in mid-cap companies ranging in value from €100 million-€500 million in Germany, Switzerland, Italy and the Benelux countries.

“There are more possibilities: re-capping, the IPO market is open and there are international buyers, including strategics from the US and China. There is a lot of liquidity, new names, new GPs from Scandinavia and also joint European-Chinese structures. The M&A advisor market is sophisticated. You have to be very careful and thorough when you do your due diligence. Transactions move very fast.”

While prices are high, they are not as elevated as the UK, France or Scandinavia and “GPs are still disciplined”, he adds.

But “unless you have serious strategic trade interest, it’s typically private equity and financial buyers that are willing to pay those multiples”, says Mark Nicolson, head of primary investment at Aberdeen Standard Investments, who notes the level of secondaries activity in Germany is increasing.

It is the volume, not the value, of transactions that indicates the health of the market, he says. “There has been an increase in the number of deals. We’re close to peak levels of activity.”

GPs are “becoming more creative and not just in terms of buy-and-build, which we are seeing coming to the fore, but also in terms of structuring minority deals with entrepreneurs”.

Stuck in the middle

The opportunity lies in Germany’s swathe of Mittelstand – medium-sized – companies. However, the flow of succession deals expected from almost four million small and medium-sized businesses has been slow to materialise.

“Buyout fund managers are still waiting for a wave of transactions due to succession in the German market,” says Frank Amberg, head of private equity and infrastructure at MEAG Munich Ergo Asset Management. They are hampered by slow acceptance of private equity as a source of financing and open debt markets, which mean entrepreneurs can often get finance from their local savings banks.

“A US GP, for example, coming into town and asking for the keys of the business would rather be seen as a stranger and many entrepreneurs will be reluctant to sell their businesses. However, the younger generation of German founders and entrepreneurs is more open and has a different mindset. For them, private equity is more commonly accepted.”

While the economy is performing well there is little impetus for voluntary leadership change, says Simon. However, “owners in their 70s are successful today, but if you talk about trends or emerging issues – how to compete against China or upgrade manufacturing to industry 4.0 – it is obvious that they face challenges for which they are not prepared yet”.

Companies are benefiting from global economic strength but not all have improved their market position or invested in growth, which could become a problem, he says.

“For today’s global challenges, including technological disruptions, you need different skills and that’s a leadership issue. For distressed funds this might be something interesting when the economic cycle turns in the future.”


Germany-headquartered GPs collected almost €3 billion last year, up from close to €2 billion the year before, according to PEI data. “Fundraising is even easier than it was a year ago for German GPs,” says Nicolson. “Smaller funds are not just raising €200 million-€300 million, but up to €500 million. And some have ambitions to raise €1 billion to rival the likes of Deutsche Beteiligungs AG, Hg and Equistone in the local market. I’ve been surprised by how quick some of the fundraisings have gone and some of the managers that have managed to hit their hard-caps.”

In light of the amount of market liquidity, Nicolson cautions LPs: “You have to choose your investment well. Selectivity will come into its own. A lot of investors have for a number of years sprayed their capital across the market. With more capital in the market we are going to see a greater spread of returns going forward.”

A lot of private capital has been invested in infrastructure in recent years, and more teams are spinning out and creating new platforms, says Amberg. Germany, which has successfully sold major infrastructure assets including gas and electricity grids, “offers a stable regulatory environment and a wealthy customer base”.

“This is important for investors. However, nothing is cheap, as infrastructure asset valuations are high, sometimes even higher than in private equity based on EBITDA multiples,” he says.

Simon points to the blurring of distinctions between infrastructure and private equity assets as sellside advisors reposition assets to appeal to infrastructure funds with lower return requirements versus buyout funds. “[German energy service companies] Techem and Ista were structured originally as buyout opportunities and then they became infrastructure investments,” he notes.

“GPs are trying to redefine their turf in order to continue to generate double digit returns” by labelling more risky assets as infrastructure and structuring them like private equity transactions including higher debt levels, says Amberg.

Managers are also taking on increasing amounts of debt at the fund level to boost internal rates of return, he says, “up to 20-30 percent or even more, which is a lot and not only just for short capital bridging”.

“We are cautious here and have started active dialogues with our managers. We see that GPs want to become more flexible in deploying capital and tend to retain rates of return by using all the means they have.”

Get in line

The investor community is demanding greater transparency over the use of subscription lines, and its contribution to the calculation of IRRs, says Patricia Volhard, partner at Debevoise & Plimpton. “It’s mainly about disclosure. It is not leverage as long as the borrowing is short term and always covered by undrawn commitments,” she says.

Over the past 12 months, Volhard has seen more regulation regarding disclosure of fees and charges, as well as GPs diversifying into private debt, increased activity in secondaries and more GP-led restructurings. More US and offshore funds are also establishing parallel vehicles in Luxembourg to meet German and European investor regulatory requirements and to be able to market more efficiently in the EU, she adds.

For non-European funds “reverse solicitation has become difficult” and the EU legislator is set to introduce a new definition of pre-marketing. The first proposal was “very restrictive”, limiting pre-marketing to general conversations on investment strategy without mentioning the fund in question.

“The Council of the European Union recently proposed a more helpful definition and it remains to be seen what the final outcome will be. It will be extremely important that pre-marketing permits talking to investors about a specific fund and also providing drafts. For example, in Germany it is important for GPs to be able to provide the fund documentation when talking to investors in order to find out if they can address their tax and regulatory concerns before they go through the relatively burdensome process of filing [which requires a depositary],”  Volhard says.

Tax and regulatory concerns have not decreased but there is hope national and EU regulators will be aware of their new responsibilities, she adds, which will include an effort to understand the industry to supervise it efficiently and reasonably.

The new Solvency II regime overseeing insurance companies is “less rigid than the Investment Ordinance that applies to German pension funds, which can cause some frustration among international GPs. However, on the sponsor side, there is nowadays better understanding and willingness to address concerns that German investors have,”  Volhard says.

Compliance requirements imposed on German LPs make it difficult to access venture capital funds, which play an important role in MEAG’s allocation, Amberg says.

“As the top VC firms are very access-restricted you need to build up relations over a long period of time. The success of getting access may then coincide with regulatory requirements which oblige LPs to ask for increasingly more information during their due diligence process. This may be difficult for VC funds to digest as the top funds are used to very swift fundraisings. If you show up with long lists of information requests, they may rapidly close the door again.”

There is no strong industry lobby on the insurance and pension fund side to push for regulatory improvements in private equity investments, says Volhard, noting that lack of awareness of private equity in Germany applies not only to the public but to the regulator as well.

Being more direct

German LPs are seeking closer GP relationships

German investors “are still among the heaviest users of funds of funds in Europe”, says Nicolson. While some may commit to large pan-European funds directly, many “use funds of funds for specific strategies and to gain diversification across Europe and North America, as well as access to and the capability to undertake due diligence on smaller managers”, he says. Investing in funds of funds is also cheaper than hiring and incentivising a good team, he adds.

Amberg agrees lack of sufficient time and resources to cover the whole asset class is a driver.

“Frequently, there is only one investment officer in charge which is not sufficient to build necessary relationships and a broad portfolio covering the various strategies in private equity. Hence, some LPs refrain from doing investments into single funds and prefer to build diversification by choosing the fund of funds model.”

However, “on the other side we see mature LPs turning away from their fund of funds approach and going more directly into funds. Others are combining their exposure with co-investments, although I’m not sure all LPs know what they are doing. Overall, German LPs are moving down the road, becoming more experienced, asking for better returns and trying to get closer to the asset class than before”.

Strong and stable

However, Germany remains appealing to GPs thanks to its stable macroeconomic and political environment, says Simon. “All the noise around Brexit and Italy, in that context what is happening in Germany is really predictable. That applies as well to Switzerland.”

The German economy, Europe’s biggest, displays a “good mix of old and new economy business models”, Simon says. “There are very successful companies that have found a niche and are leading their respective markets and participate in global growth. Germany can be proud of its strong industrial base. We have a balanced service sector versus automotive versus chemicals versus new economy. It is a relative heterogenous economy. That attracts different pockets of investors.”

“Germany is the powerhouse of Europe,” says Nicolson. “There is always going to be an attraction. To do well from a deal perspective, you need to be on the ground, have local resource and a long-term track record. Some larger GPs get to this stage in the cycle, feel confident and open an office in Germany. This is a top of the market phenomenon.”

Nicolson points out that the private equity market is entering its longest bull run in history. However, this time around, “GPs have been more sensible”.

“They have been more conservative in the structuring of their deals and using less debt. We don’t see many German GPs taking more than 2.5-3.0x EBITDA in terms of leverage. If there is another downturn, investors are going to be better protected.”

Achtung baby steps

Historically, German LPs have limited their exposure to private equity, but that is changing

Previously, German LPs have held back from investing in private equity due to regulatory constraints and investor caution. However, the search for returns has tempered some of the “inherent conservatism in the German market”, and increasing numbers of domestic LPs are allocating to private equity, says Nicolson. “It’s small allocations initially. I can envisage a day when German investors seek larger allocations as the industry proves its worth.”

“The number of pure German GPs in our portfolio is rather limited. We are generalists and reluctant to put too much money into single country or sector specific funds,” says Amberg. “Instead, we prefer to invest into leading pan-European or pan-American managers with a proven multi sector approach. For MEAG, diversification is always key.”

However, those LPs that have invested in private equity are retaining their allocations because they “are satisfied with the returns achieved in the last years. Private equity is continuously benefiting from current sellers’ market”, Amberg says.

For Simon, “access to German-speaking LPs is very important. Local LPs want to invest in GPs with a similar cultural approach, which is less Anglo-Saxon, less opportunistic, and focused on this region and building up the Mittelstand”.

Capvis’s investor base is globally spread among all its funds primarily in Europe with a large share of DACH investors, as well as from the US and Asia. Restrictions on German pension fund allocations to the asset class have meant “the concentration of German LPs [in our portfolio] is not the biggest. The good thing is [local LPs] are not retreating and their level of sophistication is increasing and they want to increase their share of alternatives”, he says.

As local appetite for private equity grows and LPs seek larger allocations, “I see fund sponsors being prepared to address the very specific regulatory concerns of German investors”, says Volhard. “In the past, sponsors said it’s just not worth the hassle of addressing all these concerns for only German investors and looked to the US or Asia [instead].”

That, however, is no longer the case. Europe – and Germany more specifically – seems to be worth the hassle for many fund managers.

The roundtable was sponsored by Aberdeen Standard Investments, Capvis Equity Partners, Debevoise & Plimpton and first appeared in the July/August issue of Private Equity International.