Study: ‘German realisations drop by 71%’

GPs and LPs looking to benefit from growth in German Mittelstand companies will be concerned that the number of entry and exit deals decreased significantly last year.

Capital realised from German target companies was down 71 percent to €7.6 billion in 2014, from €26.6 billion in the previous year, according to S&P Capital IQ’s latest Private Equity Market Snapshot.

It was the lowest annual number of new investments into German companies since 2010 and the first time that the number of entry deals and aggregate capital deployed had declined on the previous year.

A similar trend occurred on the exit side, with only 162 deals in 2014. This was a 20 percent drop from 202 in 2013, according to S&P Capital IQ. 

“Industrials has consistently been a top three sector for private equity investment in Germany over the last 10 years,” Silvina Aldeco-Martine, managing director at S&P Capital IQ, said in a statement. “Yet, it is notable how a number of factors have created heightened uncertainty for the growth prospects of German industrial target companies over the shorter term, primarily due to the sector’s reliance on exports as a major source of revenue. These factors include the ongoing trade sanctions with Russia, a traditionally strong trading partner with Germany, as well as the economic slowdown in China, a strong importer of German goods.”

However, as suggested by both broker research analysts’ earnings estimates available on the S&P Capital IQ platform and Standard & Poor’s Ratings Services, on a medium-to-long term basis the fundamental strength of Germany and its industrial sector is expected to hold. It remains unlikely that Germany will cease to be a long term destination for private equity firms globally, S&P Capital IQ added.

Private equity penetration has historically been very low in Germany, and doing deals can be very challenging, Peter Wirtz, a partner and managing director at 3i Germany told PEI last year. “In some countries, you can call a management team in a company or an owner and you agree to talk to them. In Germany, it’s very hard to get a foot in the door. It’s a cultural thing. You can’t just call someone and say: ‘We’d like to talk to you about your business’. You can hardly get any traction with that. So you have to do it more subtly, through your portfolio companies or through some contacts that you have on the ground. Just ‘calling’ and getting into the company is almost impossible.”

“German entrepreneurs have often inherited the company, and even the founders became entrepreneurs by accident – they just had to feed their family after the war, and started a business to earn money. The founders never thought: ‘How can I prepare my company to become a professional market business, or make sure that the sales of my company rise by a certain percentage?’”, Hanns Ostmeier, executive chairman and member of the investment committee at Halder, told PEI in the same interview.

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

With such a significant company base, funds focused on Germany continue to be raised. In 2013, 11 German-based funds collected a combined $2.79 billion, while $2.45 billion was raised by 11 funds in the previous year, albeit below the $3.52 billion amassed by 20 funds in 2011, according to Private Equity International Research & Analytics division.