Private equity to the rescue in Germany

Christoph Kaserer from TUM Business School and Munich University of Technology discusses deficiencies in the corporate governance model in Germany and how foreign private equity investors can help make a change.

Christoph Kaserer heads the Department of International Capital Markets of TUM Business School and the Center for Entrepreneurial and Financial Studies (CEFS) at Munich University of Technology, where he focuses on private equity and asset management. He talks here about the future of private equity in

The locust debate in Germany appears to be over – or is it?
I would say the discussion is not over. I am due to speak in front of a group of German parliamentarians about private equity for example, which shows that for politicians it is still an issue. What we have seen though is a rise in public awareness of private equity as a consequence of the locust debate. And if you look at recent investment statistic sand talk to private equity funds managers, you will find that investment activity has picked up significantly. One explanation is that as a result of the debate, private equity is now seen as a viable alternative to more conventional ways of financing German companies.

Will the country benefit from the increase in investment?

Kaserer: bad governance in Germany

More private equity means better run companies. Germany has had a tremendously deficient corporate governance model, there are plenty of examples of corporate governance in this country not working for a long time.

Can you give an example of bad governance?
The most obvious example is DaimlerChrysler. If you had invested €100 in DaimlerChrysler in 1987 and sold in mid-2005, your shares would have had a value of about €140. Over an 18-year period, that’s awful. If you had invested the same amount in BMW on the others, you would have sold at almost €600. Why? Because BMW is controlled by an active private investor, the Quandt family, whereas DaimlerChrysler has been without private shareholders all along and hence without anyone interested in corporate governance.

That is why there were no significant management changes at the company during all these years. I am deeply convinced that the only people who can change this are active investors coming in from the outside, people who are not part of the German establishment – i.e. private equity investors and hedge funds.

All the large LBO groups are based outside Germany, and much of their funding comes from outside Germany too. Doesn’t this make it hard to argue their case in the country?
The corporate governance argument, which applies to large listed corporations, is easy to explain. When it comes to restructuring private companies in the Mittelstand, the situation is more complicated. These companies are often sold to financial investors because the original owners didn’t restructure in time, so all the new owners are doing is what should have happened years ago. If this means jobs will be lost, the message is that if you don’t restructure now, all the company’s jobs might be lost before long.

What about venture capital – is it viable as an industry in Germany?
Yes. From a basic supply side perspective, there is all this money coming in, and not all of it can go into buyouts. So capital is available. What about demand? I think it is still not understood that, especially in the academic landscape, we will have a more dynamic development in the future. Following a recent change in German law, the universities now own the intellectual property that they generate, as opposed to the academics creating it.

At the same time, government funding for universities keeps reducing, which puts pressure on academic institutions to professionalise their invention management and to bring their innovations to market. This is starting to happen, and it will create significant investment opportunities. As a result, the idea of creating university-specific venture funds is becoming more wide spread. We’re moving towards the system that was implemented in the US 15 to 20 years ago. I’m optimistic in this regard.

This article originally appeared in the July/August issue of Private Equity International.