DACH buyouts on the rise throughout 2016

Germany, Austria and Switzerland saw a total of 274 private equity deals in the period between January and November 2016, marking a significant decrease compared to the 342 seen during the same period in 2015, according to unquote" data. Nevertheless, aggregate deal value remained almost exactly the same at €22bn.

Despite this increase in average deal size, there was a notable difference in the aggregate value generated from mega-deals: while last year's two largest buyouts were valued at €3.5bn and €2.8bn, 2016's most sizable buyout was the €2.8bn acquisition of speciality chemicals producer Atotech by Carlyle, followed by EQT's spinout of the real estate services business of German engineering company Bilfinger for €1.4bn EV.

A lack of dealflow at the higher end of the market is also observed by Clearwater International's managing partner Markus Otto: "As a result of the high valuations, private equity houses missed out on an increasing number of deals to strategic buyers throughout the year. GPs can have a hard time finding deals that pay off."

Yet while this presented challenges on the deal-making front, it also resulted in high returns for the industry. Global private equity firms proved most successful in the German market: US investor AEA and Teacher's Private Capital jointly sold Dematic, a German supplier of logistics automation equipment, to trade buyer Kion for $3.25bn. Meanwhile KKR exited household equipment manufacturer WMF to its French competitor Groupe SEB in a €1.59bn EV trade sale.

Tech leads and buyouts rise
The most popular sector during the 11-month period was technology, with 110 deals. However, the majority of deals within the space fell into the early-stage and expansion categories, which accounted for 85 deals and €1.1bn of value. The number of technology buyout deals increased from 14 to 16, but increased significantly in value from €700m to €1.9bn. The largest buyout deal in the tech sector took place in Switzerland in June, when Astorg Partners acquired a majority stake in AutoForm, a developer of software for sheet metal forming simulations, for a reported CHF 700m (€648.6m).

As in previous years, the industrial sector remained particularly popular, in large part due to the fact 85% of overall dealflow was generated in Germany. The appetite for the industrial sector is in large part due to Germany's strong SME sector: 55 of 70 DACH deals within the space were valued at less than €100m. According to Detlef Dinsel, partner at IK Investment Partners, dealflow in the larger sector has suffered this year: "Currently, there is a lot of dealflow for opportunities under EV €100m, because private equity faces less competition in this segment of the market."

Despite an overall decline in deals, the DACH market saw a total of 85 buyouts in the 11-month period, higher than the total number in any complete year since 2011. This also marks a significant increase on the 68 seen during the same period in 2015.

The overall decline in dealflow was primarily due to venture capital heading in the opposite direction. Early-stage and expansion deals decreased by 30% from 269 to 188.

The year ahead
Uncertainty fuelled by elections might have an impact on private equity dealflow in the year ahead, as people in Germany and multiple other European countries head to the ballots for general elections in 2017. Despite the possibility of political change, Otto remains optimistic: "We are very positive about the first quarter of 2017, and numerous factors indicate that the high level of activity will carry over into the next year."

Apart from the usual suspects such as industrial suppliers and engineering businesses, Otto recommends investors keep an eye on industrial chemicals businesses and healthcare, suggesting they have historically proven profitable for both GPs and VCs.

The DACH region has seen large sums invested in biotech startups, including a €40m series-A for German company Iom and IK's acquisition of German business ZytoService. DACH's healthcare sector is on the rise, according to Uwe Steinbach, partner at medtech-focused SHS Gesellschaft für Beteiligungsmanagement: "This year we have seen a lot of interest from China – the buyer market there is developing rapidly. The growing middle class in Asia and the Middle East is keen on quality products from Germany, Austria and Switzerland, and this also boosts the healthcare sector."

With a rising number of buyouts and positive developments in several sectors, 2016 delivered some good news, despite low dealflow. Yet, in the year ahead, valuations and political changes will certainly continue to play on the minds of private equity players.

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