Volatility in the European Union hasn’t exactly made the last few years easy for German fund managers and investors. And incoming regulatory changes have added to the pressures. But, when PEI travelled to Frankfurt last month to meet four German private equity market veterans for a roundtable discussion, the overriding sentiment was that Europe’s largest economy is fuelling the region’s growth and providing plenty of attractive private equity opportunities.
THE MACRO PICTURE
PEI: Are macro concerns still dominating the German PE landscape like they were at this time last year?
Mark Nicolson: Certainly the macro colours every discussion that we have, [but] private equity as an asset class is designed to generate outperformance versus listed markets and other asset classes and certainly rates of economic growth. If you consider the macro in the broader context, the difference between a recession and a growth period is maybe a delta of 2.5 to 3.5 percent, whereas private equity is typically targeting gross returns of 20 to 25 percent IRR. So the fact that private equity managers are continuously able to source deals that produce these sorts of returns through economic cycles lends itself to the view that, whilst the macro is important, it’s not the biggest factor influencing private equity returns.
Christian Hollenberg: We’re not in the macro business. It is important to understand what could kill your portfolio company – there may be certain macro things that could do that. But in general, I think the range of outcomes when you look at an investment is so huge, that the macro is just a small portion of that.
You’re more in control of your own destiny in private equity investments than you would be, say, in the stock market or the bond market where you’re a passive spectator. There are certain decisions that may be driven by the macro picture, but as such, the impact of it is fairly limited. Also we are mostly German-based in our investment strategy, so from the macro point of view I’d say that’s pretty much the place to be for the moment anyway, so we have a little less concern than maybe some other [European GPs] may have.
Then you don’t accept that buying into Germany is buying into the region?
Hollenberg: Buying into Germany into a successful company essentially means buying into the world market. Even small companies: we have some relatively small businesses in our portfolio that have a 70-80 percent export ratio, so you’re essentially buying into the world economy. You’re betting on the relationship between the euro and some key other currencies, in Asia for example, but you’re not buying into Greece, Spain, Portugal, or to a very small extent.
Nicolson: I’d totally agree with that. Germany is the second-largest exporter in the world. The world-class industries and expertise that Germany has means a lot of the companies are export-driven; so buying into Germany is really buying into a powerhouse economy. This coupled with near-to-full employment and consistently low wage inflation has meant that Germany has and will continue to be the engine room for European growth. These factors contribute to Germany being one of the most attractive private equity markets to be in.
Georg Helg: We’ve been investing in Germany for over 10 years. Though we opened our Frankfurt office only two years ago, if you looked at our portfolio at that time it was already approximately 50-50 Germany and Switzerland. We mostly invest in global niche market players that have a substantial portion of their sales in foreign countries. As others have mentioned, it’s about investing in the world through these global niche players headquartered in the German-speaking region.