DACH family businesses open up to private equity

Private equity firms in the DACH region have once again raised a lot of capital in 2017, closing many funds. But high pricing and difficulty accessing certain companies has held dealflow back. Solving these issues will be key to a successful 2018.

"The DACH market, and Germany in particular, continues to have relatively robust economic conditions, which makes the region attractive for LPs," says Karl Adam, director at placement agent Monument Group Europe. This explains how GPs raised €10.1bn at final close for 19 funds in the first 11 months of the year, just behind 2016's record of €11.7bn from 20 vehicles with a month left, according to unquote" data.

Adam expects this activity to continue into 2018, with the caveat that LPs will still be highly selective: "The DACH region contains a fairly large number of Mittelstand GPs, with fund sizes of €150-400m. This is a crowded market and the best ones will likely raise quickly in 2018, but less differentiated ones may struggle."

"The DACH market, and Germany in particular, continues to have robust economic conditions, which makes the region attractive for LPs" – Karl Adam, Monument Group Europe

In order to differentiate themselves, GPs have to show they can source deals in a way that avoids having to pay the extremely high entry multiples that are increasingly becoming market standard. "Deal multiples continue to rise, and if this continues LPs may become more vocal about restraint on fund size increases," says Adam. "More disciplined GPs are stepping out of processes if they don't have an angle, so deal pace may continue to be subdued in 2018."

Investcorp's Carsten Hagenbucher is also worried about pricing: "People are applying peak multiples on peak EBITDA and in certain sectors that's fine. But I'm puzzled about that for cyclical assets." He also agrees that GPs need to think carefully about which auctions they participate in. "For us, it's all about focus and identifying potential companies that fit our investment criteria. You have to be well prepared and motivated as you enter the auction and find an angle that others have not identified. We are very selective on where we engage. If you just participate in a process without an angle, there is a high risk you won't get anything done."

Even if pricing can be overcome, many attractive businesses have historically been owned by families that are reluctant to sell to private equity. However, Hagenbucher says this is beginning to change: "Over the past few years, from a volume perspective, Germany has been a bit disappointing, but we've seen a bit of an uptick, which I hope will continue. We are having more and more discussions with family-owned businesses."

Next generation
As younger generations takes over from their parents, more companies will be open to a sale, or at least a partial realisation. There is some evidence this is happening already; in 2017, 54% of buyout transactions in the DACH region were sourced from family or private vendors, an increase from 50% in 2016, 49% in 2015 and 35% in 2014.

It is also true that the mid-market, where companies are more likely to be family owned, is outperforming the large-cap space. There were fewer buyouts with an enterprise value of more than €500m in 2017 (eight) than in any year since 2011, and the combined volume of the deals is at the lowest level since 2012. All this, despite Bain Capital and Cinven completing the largest private equity deal the region has ever seen when they took pharmaceutical company Stada private.

P+P Pöllath + Partners' Tim Kaufhold acknowledges this trend, but points out that the distribution of larger deals can be somewhat arbitrary: "The activity is mostly in the mid-market. In total volume there are not so many large-cap deals in the DACH region, so it's a little bit random which calendar year they fall into."

Investcorp's Hagenbucher believes 2018 could be a good year for big deals, arguing that there are numerous conglomerates on the DAX30 spinning off "sizable units" and consequently there are likely to be more opportunities "for the larger funds to chew on" in 2018.

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