Private equity becomes election battleground

Peer Steinbrueck pledged to split the banking system and prevent banks from becoming involved with private equity leveraging should he win the election next autumn. His controversial stance stirred up Germany's private equity industry and the country's banking association.

However, not everyone is convinced that Steinbrueck's announcement is a credible threat. "The investment banks won't love him," said Wilken von Hodenberg, managing director of Deutsche Beteiligungs AG and member of BVK's executive board, "but he is a centrist politician. Steinbrueck is extremely pragmatic, he is not an enemy of the economy." A lot of what was being said, believes von Hodenberg, was part of his election rhetoric and will be softened should he gain power.

Ulrike Hinrichs, managing director of BVK, echoes her colleague's views but says she finds it worrying that the SPD is set on a journey that seeks to attack financial markets: "Private equity will have to adjust to a difficult year as the 'locusts debate' usually falls on fertile ground with the German public."

As finance minister of the red-black coalition under Merkel, Steinbrueck proved to be less of a left-wing socialist than a close ally of centrist-conservative Merkel. Together they devised a raft of regulations to stabilise the financial markets in 2008, including regulations for company takeovers and legal foundations concerning the selling of non-performing loans, which private equity professionals welcomed.

Steinbrueck's rhetoric is similar to that of French president Hollande, who shocked the French private equity market with tax hikes following his takeover. However, the drastic measures that France experienced, including raising capital gains tax, are highly unlikely to hit Germany, according to von Hodenberg: "Some of what happens in France is unthinkable under German constitutional law."

German banks have been curiously quiet over the past weeks and a closer look reveals that actually only Deutsche Bank is directly affected by Steinbrueck's rhetoric as it may be forced to ring-fence its retail division – a move that is not necessarily bad for private equity, says von Hodenberg. As for the issue of leveraging, Christoph Schalast, professor at Frankfurt Institute for Private Equity and M&A, says, "Leveraging involves a competition between international banks that very often gets handled in London. I doubt German national regulatory changes will have much of an impact on that."

Germany is an interesting market with lots of high quality targets due to its distinct Mittelstand, says Schalast: "I can't imagine Germany's government would implement different regulations to everywhere else in Europe; but if it does it is my firm belief that the private equity industry will just adapt."

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