Germany A tough sell

Any LP looking for European exposure is likely to consider putting money into Germany. It’s easy to see why. Germany remains the strongest economy in the Eurozone: in the first quarter of this year, it saw economic growth of 0.8 percent, according to Eurostat, the European Commission’s statistic’s bureau. The French economy, by way of contrast, saw no growth at all.

When PEI arrives in Frankfurt on a sunny afternoon, the brightening economic prospects seem evident across the city. On this, an average weekday, the city centre is booming – with crowds of consumers wandering in and out of shops carrying large shopping bags.

The five industry experts participating in our roundtable come across as equally optimistic. “Germany has always been an interesting market,” says Mark Nicolson, a partner at SL Capital Partners. “It has a world leading manufacturing and industrial base and is the third largest exporter in the world. For investors, these are some of the attractive fundamentals they are looking for.”

THE BULL CASE

This is perhaps why German-based funds have been able to consistently raise capital for the region. Last year, 11 German-based funds collected a combined $2.79 billion; that’s similar to the $2.45 billion that was raised by 11 funds the previous year prior, albeit below the $3.52 billion amassed by 20 funds in 2011, according to Private Equity International Research & Analytics division.

One of the managers to raise capital was Capvis, which closed its fourth fund on its €720 million hard-cap in January. “It was a successful fundraise and we saw a lot of interest from North American investors, more [so] than when we were raising [the third fund],” says Georg Helg, chief representative Germany at Capvis Equity Partners. “We also saw interest from Asia and from Dutch pension funds.”

“There has been a lot of demand for private equity that hasn’t been satisfied by recent fundraisings, particularly from some large institutional investors and pension funds,” adds Nicolson. “So when German GPs come to the market, we see a lot of demand for their funds. For pension funds the denominator effect has played a role as well – listed markets are up, which means they have to deploy more into private equity to maintain their allocations.

“Additionally, exit activity continues to be extremely strong, so there’s a lot of capital coming back to investors which they have to re-deploy. Germany is one of the most attractive markets in Europe, so inevitably that’s where some of the capital is going to go.”

Many investors feel the German market is attractive because primary deal flow opportunities remain extremely promising. The Mittelstand includes around 3.7 million companies, over 95 percent of which are family-owned businesses.

This represents a significant opportunity for private equity, says Nicolson. “Germany has one of the lowest rates of private equity penetration as a proportion of GDP in Europe. In fact, it’s got the lowest rate of private equity penetration of any country in northern and western Europe. That means there’s a sizeable opportunity there in terms of increased PE activity.”