“Steady” growth for PE in Germany

Martin Block has just joined Mercury as director of leveraged buyouts but has been working in Germany for three years. Here, he gives PEO the inside track on what to expect from the much-vaunted tax reform in 2002.

Martin Block has just joined Mercury Private Equity as director of leveraged buyouts.

He has spent the last three years in Frankfurt and has an insider’s view on one of the most hyped developments in European private equity – the German tax reform – which will, according to Commerzbank, turn Germany into the Eldorado of private equity.

But Block says the reality will be different. “All the reforms will do is gently take away an impediment rather than give an immediate push to dealflow,” he says.

This means that private equity activity will increase steadily instead of exploding as some expect. “Private equity will gradually gather momentum rather than be very quick to pick up,” he says.

Block hints that investment companies may in consequence risk disappointing investors that expect instant returns. “I’d like to say we have allowed flexibility because we know it will not come overnight,” he says. “But some firms may be under more pressure to invest, which will be intriguing. That brings its own problems.”

Instead, Block believes the real action is in the other side of the market: increased shareholder value. “Corporations are looking much more closely at shareholder value,” he says. “This has been much-vaunted but it hasn’t really been fully undertaken here.”

Renewed concentration on shareholder value could trigger attractive spinoff deals in Germany’s industrial heartland. “It’s something we want to farm intensively,” says Block. “Companies like Bosch and Degussa have such huge portfolios of businesses that if you shake tree at the top, as you get the ripple effect you get some attractive businesses that are very unloved.”

Aside from traditional industry, Mercury has a focus on German healthcare companies. “Munich particularly has become a quite a centre for that sort of investment,” says Block.

However, he says Germany’s Neue Bundesländer, the former East, is throwing up fewer opportunities. “I haven’t personally seen a huge dealflow from there,” he says. It’s worth keeping an eye on though: “Quite a lot of technology has gone there because you can get grant finance and subsidy relief,” he says.

Block is the sixth member of Mercury’s Frankfurt team. Previously, he was director in the Royal Bank of Scotland’s leveraged finance group and has also worked at Credit Lyonnais, County NatWest and HSBC.