Strong LP appetite and creative credit to fuel DACH growth

The DACH region recorded 162 buyouts with an aggregate value of €27.5bn in 2018, up from 157 worth €25.9bn in 2017, according to Unquote Data. This makes 2018 the fifth consecutive year of increased dealflow and comes off the back off two very strong fundraising years.

"Volumes have been up, as they have in many other regions," says Marina Jovanovic, head of DACH at placement agent Rede Partners. "But in DACH specifically, 2017 was a record year when it came to fundraising, both for fully DACH funds and large and mid-cap funds across Europe. A lot of that was deployed in 2018."

Jovanovic has observed similar growth on the LP side, as more institutions see the benefits of allocating to alternative assets in general and private equity specifically: "Within DACH, there has been an increase in the number of LPs and they have been increasing allocation to private equity overall. In this way, it has gone from being not the most important area of Europe, to top two or three."

Even with growing demand for private equity in the DACH region, the market is increasingly competitive, both from an asset sourcing and fundraising perspective. "We see more specialisation by sector, but also transaction type, which could be minority investments, buy-and-build or a particular structured equity approach," says Jovanovic. "Investors are more interested in specialisation and really understanding what repeatable, replicable edge a GP might have."

For LPs, this is going to be another big year in terms of volumes and investments, and we could see some new prominent DACH GPs” - Marina Jovanovic, Rede Partners

GPs that achieve this will raise very quickly. Buy-and-build specialist Auctus Capital Partners, for example, is expected to launch its fifth fund targeting €250-300m in early 2019, and closed its €230m predecessor after six weeks on the road.

Investec’s Kai Stengel sees first-hand how these specialisations translate into deal activity: "GPs need to have some sort of angle and ideally come with an acquisition that they have already lined up, or have a very good connection with the management. Either that, or a bigger consolidation play so they can justify paying over 12x."

Unquote, in a collaboration with Clearwater International, recently reported on the high average entry multiples paid by private equity firms in the DACH region. The report cited the strong performance of German companies as one of the drivers of high pricing, and Stengel makes the same observation from the lending perspective: "Strong businesses with good potential in the German mid-market can comfortably attract up to 5x senior and up to 6.5x total leverage from banks."

Creative credit
Private equity funds are not the only ones with large amounts of dry powder to deploy, and pressure on alternative lenders has led to some creative practices and specialisation. "When looking at unitranche facilities more generally, an interesting new development we have seen recently is re-load facilities," says Stengel. "These offer an uncommitted facility outside the normal term loan that can be drawn to re-leverage up to the opening level, if the company is growing fast or making acquisitions."

Private debt funds were able to increase their market share in Germany last year with the growing use of "first-out, second-out" unitranche structures, allowing them to work together with banks to finance a wider range of deals. The reload facility has yet to be widely adopted. "Investec has not done one, but we have seen a few in the market recently," says Stengel. "Effectively, it is a one-off opportunity to re-lever to opening leverage within 12-18 months of closing."

Technical concerns aside, market participants are confident in the DACH region’s fundamentals for 2019. Karsten Langer of pan-European GP Riverside Europe expects its deployment to be tilted towards Germany and northern Europe in 2019. "In our experience, there tends to be a difference in Germany and the Nordic countries," he says. "We tend to see younger management teams that are looking for a partner to help them get to the next stage, but want to get involved and keep running the business and will reinvest for a large minority stake in the business."

Rede’s Jovanovic makes a similar prediction on the fundraising side: "For LPs, this is going to be another big year in terms of volumes and investments, and we could see some new prominent DACH GPs."

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