Frankfurt/Main – More and more private debt funds are operating in the German private equity market. It is estimated that more than 50 firms are seeking business in Germany, while in the first quarter of the year they financed half of all private equity deals. But despite the increasing hype, these financing competitors to the banks in the private equity space have not gained as much ground as is often supposed. That is the key finding of this year’s second private equity panel survey, which is conducted every four months by CMS Germany and FINANCE magazine. More than 50 different private equity (PE) firms in the German SME sector provide assessments of the market for the survey. Up to now, only one in three of the PE firms included in the survey have used the standard product offered by debt funds, namely unitranche financing. This involves long-term funding being made available in a single tranche that combines senior and subordinated debt capital. And to date, only two of the surveyed firms have used the newer option, a “first-out/second-out” structure. This innovative instrument splits the funding across two lenders. The bank (first out) takes a small senior share, with the debt fund providing the remaining subordinated share, which offers a higher yield.
“We have noted more use of unitranche financing of late. Debt funds are now well-established in the market, but it remains to be seen whether first-out/second-out structures are really here to stay. Ultimately, after all, they are the result of a fiercely contested financing market,” said Dr Tobias Schneider, private equity partner at CMS. Debt financiers are not doing any better than private equity firms in the likewise fiercely competitive M&A market either, Schneider added.
Private equity managers agree: the quality is right
Private debt funds may not have fully penetrated the German market yet, despite the hype, but the surveyed private equity managers appear to be satisfied with the quality of their work. One third of the panellists who have already collaborated with these competitors, who raise funds from private and institutional investors in order to provide debt capital, were favourably impressed. Their services when initiating, negotiating and implementing finance arrangements are rated better than those offered by banks. The rest of the respondents see no difference in quality between banks and their competitors, regarding them as equally good. “The banks need to come to terms with the fact that while debt funds are unlikely to take away all their business, they will definitely remain a fixture of the debt market,” commented Tobias Schneider.
For the second time in a row, there are also signs of a possible trend reversal in the financing market. According to the respondents, the market is no longer as enthusiastic about the sometimes aggressive offers from debt funds. The panel’s responses suggest that both access to finance and the quality of the financing terms remain at a very high level, but are not rising any further. “This doesn’t necessarily mean the party will soon be over, but we have been expecting a certain degree of consolidation for some time now,” said Dr Jacob Siebert, also a private equity partner at CMS.
German private equity sector remains upbeat
The current panel findings indicate uniform and very robust sentiment among the respondents in the German private equity sector. There has been hardly any change compared with previous private equity panel findings. Investment targets in the software/IT, healthcare and services sectors remain in high demand. This contrasts with the companies assessed by the respondents as much less favoured: firms from the automotive and construction industries, and in the financial services sector. The firms participating in the survey also consider purchase prices for new investments to be unattractive and still expensive, rating them at 3.09 out of a possible 10 points. The surveyed private equity managers believe that the portfolio companies have positive business prospects (7.36 out of a possible 10 points). These two figures have remained largely unchanged for almost two years now.
“The overall economic situation is dictating the mood and even the favoured sectors remain the same. Having said that, we are starting to see some interesting transactions in the automotive industry again,” commented Jacob Siebert.
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