Germany: what next?

Catchy as it may sound, it's too easy to repeat the same old point that Germany is Europe's land of missed private equity opportunities. It's more accurate to say that the market has suffered at the hands of over-zealous, or better perhaps over-optimistic, enthusiasts – and that it, just like the rest of European private equity, has had to deal with the retreat from the technology sector and the collapse in public equity market confidence. This has resulted, until recently at least, in far fewer big private equity transactions being executed, and has seen the venture market having to retrench also. But there are still important pockets of potential in Germany.

Both hindrance and stimulant to deal-flow is the changing attitudes of German lenders. On the one hand debt is becoming scarcer, making it harder to fund leveraged transactions. At the same time though, business managers are increasingly puzzled by their bankers' reluctance to provide the cheap funding that their companies have been able to rely on for so long. KfW, the big public sector bank, recently published a survey of 7,000 Mittelstand businesses that showed one third having had trouble with loan procurement recently as the banks turn their backs on unprofitable lending. This is turning the spotlight on private equity firms with money to invest, and the German mid-market in particular stands to benefit from new financing sources being developed to help buyers succeed. As a result, new participants, with different skill sets, are entering the market .

Another important driver of deal flow is that large German companies are pressing ahead with their restructuring and divestment programmes. This summer a number of transactions have evidenced that there is significant business to be done in Europe's largest economy, with the purchase by EQT of Bayer's fragrance business Haarmann & Reimer and subsequent merger with smaller Mittelstand competitor Dragoco arguably the most impressive demonstration of what a savvy financial investor can achieve.

Another important facet to the German private equity industry is German institutional investors' allocations to the asset class. Here the picture is less rosy. German institutions, most notably insurers, are wrestling with difficult market conditions, and a host of unresolved tax-related issues mean that new commitments have slowed to a trickle.

Private Equity International has looked at the diverse factors shaping German private equity, and caught up with some key participants in this process. The result is documented in these pages.