DACH region rises up Europe's PE ranks

Since January 2017, 10 GPs have opted for new DACH offices, of which nine were in Germany and one was in Switzerland. Frankfurt proved the most popular city – counting KKR, Astorg, Idinvest, Gilde Healthcare and ESO Capital among its new residents – followed by Munich, which provided a new base for Oakley Capital, FSN Capital and Capzanine during the same period.

With the exception of KKR, all of these new entrants are GPs that are headquartered elsewhere in Europe. The UK & Ireland was the region with the next most new offices in the period, but of the seven firms opening up there, only three were new to the region, while the others were all UK-based investors opening regional satellite offices.

Simultaneously, the DACH region has recorded the largest increase in PE-backed buyout volume for the first nine months of 2018, up 11% on the same period in 2017. The Nordic region has shown the second highest growth rate with 6%, followed by France (2%), southern Europe (2%), the UK & Ireland (-9%), Benelux (-13%) and CEE (-31%). In terms of value, all regions have shown an increase except for the UK & Ireland.

Frank Hermann led Argos Wityu's DACH expansion in 2016, opening an office in Frankfurt alongside three former colleagues from German mid-market firm DI Kapital. "German PE is generally very difficult for newcomers, especially vanilla mid-market buyout funds," says Hermann. This is supported by Unquote Data, which shows only half of the 10 newcomers have managed to ink a deal since launching their new operations.

Beating a path
Thomas Fetzer, managing director and head of DACH at investment bank Baird, has a different perspective. "We have a dialogue with most of the new entrants mentioned," he says, referring to the list of firms that have opened new offices. "Many of them have already invested in the region before establishing a local office and have institutional credibility in the region. We find that the newcomers we are working with are not struggling to get into the local flow. In fact, for sellers and intermediaries, the newcomers are inherently interesting to speak to as they are viewed as particularly motivated to deploy capital in the region."

This suggests that biding their time could be a deliberate strategy. Indeed, Argos did not complete a deal until mid-2018 (almost two years after setting up shop) and then it completed two in quick succession. Hermann explains: "Argos is very well differentiated because of its ability to find creative solutions in complex and difficult situations, and has been able to complete two primary transactions in a short period of time this year."

Even in a market with increasing competition, Hermann thinks it is possible to find opportunities. "The thing that people do not realise about PE in Germany is that many processes do not complete," he says. "Our own observation is that around 30% of auctions in our size do not result in a sale, but I've heard people say the figure is up to 40%. This creates an opportunity for us because we like to look at more complex transactions where we can offer a creative solution that others would dismiss."

An example of this was the buyout of Wibit Sports in late October. Argos was able to gain an edge in the auction because of its ability to finance the transaction as an all-equity deal, which satisfied owners who did not want to see their business take on leverage.

Excess capital will still ensure a base level of deal activity, but caution around geopolitical and macroeconomic risks is taking greater mindshare among M&A decision makers" – Thomas Fetzer, Baird

Baird's Fetzer also observes this trend, although he thinks the figure is exaggerated. "A 30-40% deal abortion rate for the market sounds high," he says. "We certainly don't see that with Baird's M&A sell-side business."

However, he has observed an increasing number of transactions that have failed to complete and highlights two possible explanations: "With an increasing number of asset owners opportunistically taking advantage of strong sell-side market conditions, the quality and exit readiness of businesses coming to market is decreasing. In addition, buyers are becoming much more selective at this point in the cycle, favouring defensive target profiles over cyclical target profiles."

These factors lead Fetzer to predict a cooling of dealflow in the DACH region. "We would not be surprised if buyout levels in the DACH region were to moderate somewhat from currently high levels next year," he says. "Excess capital will still ensure a base level of deal activity, but caution around geopolitical and macroeconomic risks is taking greater mindshare among M&A decision makers."

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• Topics
• DACH
• GPs
• Investments
• Germany
• Argos Wityu
• Robert W. Baird
• Unquote Data