Germany Roundtable: Broader acceptance?

Private Equity International arrived in Munich on a sultry early summer’s day to find the squares and cobbled streets of the Altstadt buzzing with tourists and locals eagerly sampling the prosperous Bavarian city’s cultural and culinary delights.

A mile to the north, in EQT’s offices on the imposing tree-lined Leopoldstrasse, it sat down with four German PE specialists to discuss conditions on the ground and to find out which new entrants were approaching the market and how they were tackling it.

Data from PEI’s Research & Analytics division shows that of the $4.47 billion of private equity capital raised in Germany since 2008, a mere $0.36 billion has come from overseas players, but there are signs that a shift is taking place with private equity continuing to look relatively attractive compared with other asset classes.

Mark Nicolson, a partner at SL Capital, believes a number of factors are creating tailwinds for German and overseas GPs, not least the need by many LPs to allocate away from strongly performing stock markets.

“We are seeing a far higher level of distributions and many LPs are upping their allocations to private equity as they are not getting the returns they need from other asset classes,” he says.

“Lots of quality managers have raised recently in Germany, so capital is therefore embedded with those managers. Those that haven’t raised will have struggled for specific reasons. Those quality managers that are still to come to market should be in a good position because of the amount of capital looking for a home in Germany.”

Nicolson points to a number of pension funds upping their allocations after the strong stock market run, as well as increasing European institutional interest, from insurers in particular.

Debevoise & Plimpton attorney-at-law Peter Wand has also noted a marked interest from the insurance sector for German PE at a time of prevailing low yields from fixed income.
“Insurers are very interested in increasing PE in the current low interest environment because it helps with hitting their return requirements,” he says.

CO-INVESTMENT GATHERING PACE

PwC private equity leader in Germany Steve Roberts says much of the recent new entrant interest in Germany is coming from sovereign wealth funds, Chinese LPs and, what he terms, “North American LPs acting as GPs”.

Such LPs, he says, have up to now ultimately tended to approach the successful candidate with a view to co-investing.

“You see them get to the second round, but they tend to take a large co-invest with the ultimate winner. Certain funds that we work with tend to have a much stronger co-investing GP alongside them.”

While the fundamentals remain strong in Germany, the panel agreed that it still has some way to go to match the fundraising activity in other core PE markets such as Scandinavia and the UK.

While investment advisor EQT Partners’ Dominik Stein acknowledges this, he notes the rising interest in Germany from “very large Asian funds” looking for co-invest opportunities.

On a broad note, Stein believes it is becoming more important generally for large LPs everywhere to secure co-invest opportunities.

Nicolson agrees that the co-investment approach has been a “very profitable one” for his firm recently, especially from bigger firms. “Our German co-investments have done very well.”

Recent regulatory changes made by the Federal Financial Supervisory Authority (BaFin) have made private debt an area of focus for many LPs eyeing the DACH region, and, along with private equity real estate, it has become an increasingly hot area for private capital over the past year.

Wand and Roberts see private equity real estate as a key beneficiary of recent private capital activity, with Wand seeing sovereign wealth funds particularly involved.
Roberts says: “A lot of money has gone into real estate transactions – it has been a massive driver in German PE.”