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Status and Trends of the Private Equity Market in Germany

INTERNATIONAL PRIVATE EQUITY MARKET 2019

23/01/2019

The private equity market in Germany at the beginning of the year 2018 is very active, confidence among the private equity houses is strong, and the market participants expect another record year of deal making.

Private equity houses which are active in the German market predominantly see themselves on the buy-side in the coming months and consequently expect further increasing deal activity. A new record year especially in the strong mid-market segment is therefore expected, outperforming the year 2017 with more than 4.4 billion Euros of deal volume in the mid-market. In addition, an increase in add-on deal activity is also expected.

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.

The expected increase in market activity will further fuel purchase price multiples. 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 are becoming more and more important, 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 with terms comparable to those before the Lehman crisis.

The high deal activity in the German market has also an impact on the deal terms in the transaction documentation. A limited number of reps and warranties, short limitation periods, high baskets, less break-up fees are strong indicators for a typical seller-friendly market. Careful due diligence exercises will therefore become even more important. Therefore, 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 play a very 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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Authors

Tobias Schneider
Dr. Tobias Schneider
Partner
Stuttgart