The private equity market in Germany at the end of the year 2019 continues to be very active, but the confidence among the private equity houses seems to decrease slightly in light of the general economic conditions on a global and European level.
Private equity houses which are active in the German market still predominantly see themselves on the buy-side in the coming months, but almost half of them see themselves on the sell-side which seems to be an indication that valuations are still high despite a slowdown in deal activity. 2019 is expected to be a very good year especially in the strong mid-market segment with more than 6 billion Euros of invested capital in the first half of 2019 after two record years in 2017 and 2018.
Market participants ask themselves how the targets will be sourced. It is expected that the number of secondary and tertiary transactions will further increase whereas spin-offs from conglomerates are expected to remain at current levels which are rather low. Not everybody in the industry is convinced that selling targets from one PE investor to another PE investor helps the respective targets growing and developing. PE investors are therefore focusing more on operational excellence rather than on financial engineering. An increasing number of PE investors pursue a buy-and-build strategy and thereby create value not only in terms of size but also in terms of multiple arbitrages.
For the first time since the financial crisis 2007 / 2008 German PE houses experience a decrease in valuations after years of constantly increasing purchases prices. Lower valuations could fuel further deal activity. While PE houses will have a very good chance to finance even higher purchase prices with outside third party debt from banks, debt funds or other debt providers with equity portions remaining stable at rather moderate levels, the future success of a PE investment which mainly depends on the realized exit purchase price seems to become more and more challenging. IRR and money multiple expectations will have to be accommodated.
On the debt side, debt funds have become well-established market participants, mainly due to aggressive and borrower-friendly terms which banks often cannot match. PE houses capitalize on the strong competition between third party debt providers and are often successful in negotiating favorable debt arrangements, but debt providers started to tighten terms and thereby shift risk to certain extent to the borrowers.
The slower deal activity in the German market compared to the record years 2017 and 2018 mostly did not yet have an impact on the deal terms in the transaction documentation, but the number of reps and warranties started to become more and more substantial, limitation periods mostly remain short and baskets high, break-up fees are seen rather rarely. We therefore still experience a rather seller-friendly market. W&I insurances already are and are expected to become more important, they are a common feature in German PE transactions with professional insurer and insurance brokers.
Not only German and European PE investors are interested in the Germany market, Chinese market participants used to play an important role after a significant increase in professionalism, deal structuring and deal management. Following the recent debate on a European level and the historically strong influence of the US Committee on Foreign Investments in the United States (CFIUS), German politicians may focus on increasing the export control requirements in the near future to protect critical industry sectors in Germany and to create a level playing field also for foreign investments in Germany.
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- Our lawyers have been awarded at the Plumes et Caméras de l’économie et du droit. In the category "International issues and business world, professional press", the prize money was awarded to our article "Overview of private equity in Europe: France is a good student!", written by Laurent Hepp and Arnaud Hugot and published in the Lettre des Fusions & Acquisitions on March 26, 2018, in partnership with Option Finance magazine.