2020 Outlook: DACH buyout volume stalls amid macro uncertainty

Harriet Matthews
11 February 2020

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After a year that recorded practically zero growth in deal volume over 2018, GPs in the DACH region are wary that the market may be impacted further by Brexit and the US-China trade war. Harriet Matthews reports

Last year was a record one for aggregate buyout value in the DACH region, with 181 deals worth a total of €51.2bn. The stats were boosted by some high-value buyouts, such as Axel Springer's take-private in the summer, which was valued at more than €6bn, and the Nestlé Skin Health deal in Switzerland valued at almost €9bn. There were 18 large-cap deals in the region in 2019, compared with 11 in 2018. However, overall dealflow plateaued, with just one deal more recorded in 2019 compared with 2018, according to Unquote Data.

Although 2019's figures give grounds for optimism, Germany's uncertain economic growth and the potential impact of macroeconomic developments, ranging from Brexit to the US-China trade war, have weighed on the minds of GPs in the region. Germany's industrial sector has been particularly affected, says Benjamin Alt of Schroder Adveq: "You can still get deals for decent pricing, but the question is: can you sell it and who are you selling it to? This is the difficulty. If you cannot sell a tech angle with the company, or an Industry 4.0 idea, it is really difficult." In spite of this, Germany's industrial sector rose to the challenge, with 52 buyouts recorded in the sector in 2019, compared with 41 in 2018.

The gap between the value expectations of sellers and buyers was a significant feature of 2019, according to a number of market players. Thomas Fetzer of Baird sees this as a problem to address in 2020: "This year may be a year where the market is looking for a new normal in terms of valuations – valuation expectations of owners and sellers in 2019 have been very high, often looking back to the strong 2017/18 transaction benchmarks. By contrast, valuation expectations of buyers have been coming down in 2019 – they tend to be forward looking, have seen the macro environment deteriorate, and become more cautious and selective as a result."

Fetzer notes, however, that not all industries have been affected: "Where there is still alignment is in sectors unaffected by the macroeconomic cycle, where transactions still get done and valuation levels remain high. In cyclical sectors, however, there have been fewer buyers, fewer transactions, and they took longer to get done. Conversely, the number of transactions that did not complete rose in 2019 – again, potentially a reflection of a mismatch of seller and buyer preferences and valuation perspectives."

Rising to the challenge
GPs support Fetzer's assertion that deals have taken longer to close in 2019. Joachim Braun of Silverfleet Capital says asset quality has not been as consistent as in previous years and auction processes have suffered: "People tried to sell businesses in 2019 on the back of a strong 2017/18, with valuation expectations that have been high, but the quality has not been as good. We have seen many more broken auctions."

This is also reflected in the figures for exits in the DACH region, which were down in value and volume in 2019, with 133 exits with an aggregate value of more than €15bn, compared with 2018 when there were 149 exits valued at €18bn in total. EBITDA adjustments have been a concern on the buy-side. In spite of this, competition for assets remains high, with a number of GPs favouring buy-and-build strategies in the high-multiple healthcare and software sectors to avoid portfolio exposure to cyclical assets.

Nevertheless, fundraising figures in the DACH region for 2019 were buoyant, with the aggregate value for buyout fundraising hitting a peak of €7.6bn across 10 vehicles, compared with not quite €4bn across nine vehicles in 2018. With a number of final closes expected in Q1 2020, including Deutsche Beteiligungs AG's Fund VIII, which has a target of €1.1bn, there is still plenty of dry powder and LP interest in the market.

The market sentiment on the macroeconomic side is one of cautious optimism for 2020, says Braun: "2019 was characterised by uncertainty around Brexit, and trade wars between the US and other countries. As we move into 2020, some of those uncertainties will have been removed – there will be a view, or we will at least come to the point when we know what form things will take."