GP Profile: Capiton

Germany-based Capiton has been busy with portfolio management in recent months: of Capiton IV's nine portfolio companies, six have been exited, with a seventh expected to be sold imminently and the eighth in preparations for an exit. KD Pharma, the ninth company, will be put through a GP-led, single-asset secondaries process expected to close at the end of July.

Managing partner Manuel Hertweck says of the transaction: "The reason we are doing this is to secure both additional time and follow-on capital for a great portfolio company. Thus, I expect we will hold the company for a few more years." The transaction will see the company bought by a separate vehicle rather than one of Capiton's funds.

With Capiton IV's exit phase underway and Capiton V more than 80% deployed, Hertweck is fixing his sights on fundraising. The latest fund, Capiton VI, has a target of €550m, with a hard-cap of €625m. Up from Capiton V's €440m, the modest increase will account for inflated entry multiples rather than going towards doing more or larger deals. The fund will implement a similar strategy to its predecessor. Hertweck says: "When we look at our average equity cheques, they have not changed much since Capiton III."

The firm has invested in small and medium-sized businesses in Germany since inception and will continue to do so for the foreseeable future. However, Hertweck admits that investing in the Mittelstand is not without its challenges. Germany's family-owned businesses can view financial investors and private equity firms with suspicion, though that is slowly changing. Says Hertweck: "We are not sure the floodgates will ever open as much as they have in, say, the Nordic region and in the UK, but they have become a lot more friendly towards financial buyers in the past few years."

Healthy competition
When asked about the growing competition for Germany's SMEs, Hertweck says: "If you look at secondary buyout activity and at the larger transactions, there seems to be much more competition, but we focus on proprietary primary situations, where there has not been that much of an uptick in the number of competitors." Capiton V has nine portfolio companies, with the 10th deal currently in motion and all of these were primary buyouts.

The number of entrants into the DACH private equity market has grown dramatically, with firms such as KKR, Altor and Oakley Capital opening regional offices over the past year. Hertweck sees these GPs as potential buyers for his portfolio. In the past two years, Capiton has exited Schur Flexibles, ZytoService, Freudenberg Bausysteme, Lap Laser and Prefere Resins to private equity buyers.

The market has witnessed an increase in entry multiples after growing private equity interest in the region. Hertweck says: "Prices are up, but less so than in the large-cap segment. We find that sometimes the price expectations of the vendor just does not fit with our valuations of the company. Everyone is just trying to find a strong exit, but if you are persistent you can still find assets at decent prices." Capiton V's weighted average entry multiple is 7x EBITDA, below the market average of 10x.

Digital dreams
Like most GPs, Capiton is looking at digitalisation to boost value creation. "One vital factor to consider now is digital transformation because it is going to affect all our companies, in terms of both due diligence, value creation and the possibility of value destruction," he says.

While the firm does not employ permanent operating partners because of the niche areas of its portfolio companies, Hertweck does plan to establish an industrial advisory board that will share expertise on the firm's target sectors and areas such as digital transformation, supply chain and production.

Capiton takes a reactive approach to deal generation, with the bulk of its transactions generated by advisers and investment banks. The firm is also currently focusing on four sectors to generate dealflow proactively: pharmaceuticals, medical technology, industrial automation and sustainable consumption. "We have decided to focus on these industries, as we have a good track record of investment and a strong network in them," says Hertweck. The firm has rolled out its CRM to the investment team and implemented new IT infrastructure for this. "Proactive deal generation helps you manage peaks and troughs in reactive deal generation," he says.

In addition, the firm is one of eight in the Global PE Alliance, which share investment opportunities and expertise in international expansion and internal processes. Hertweck says: "There are some markets represented in the alliance, such as the UK, that are more advanced in proactive deal sourcing, and we are trying to learn from them."

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