DACH PE looks to mid-term effects as lockdowns ease

Figures from Unquote Data show that buyout dealflow in the DACH region fell from 52 to 37 between Q4 2019 and Q1 2020. While this may seem like a moderate drop given the tremendous impact of the Covid-19 outbreak on local economies and M&A processes, it is worth noting that virtually no deal valued in excess of €250m got inked after February (apart from Schülke), and that the full impact on any contraction in deal announcements will most likely not be truly apparent until Q2 figures are released.

GCA Altium's latest Mid-Cap Monitor reveals that the financing market in the region was initially in good health in the first quarter, with direct lenders again increasing their market share: debt funds backed 60% of LBOs between €20-500m in Q1 2020, compared with 52% in Q4 2019. However, the firm also sees a significant impact to come in Q2 2020, even if market sentiment is improving.

Germany's economy shrank by 2.2% in Q1 2020 according to the Statistisches Bundesamt, the worst figure since 2009. GCA's Mid-Cap Monitor also noted that 72% of Q1 2020 debt transactions were recaps, refinancing or add-on financings, compared with 44% in the same period in 2019. New primary and secondary buyout financing also fell from 56% in Q4 2019 to 28% in Q1 2020.

Stefan Jaecker, managing director for the DACH and CEE regions at DC Advisory, says the firm adapted as quickly as possible to the emerging needs of sponsors as the effects of the coronavirus outbreak and ensuing lockdowns became clear, with a focus on its debt team, which handles financing and restructuring mandates. "Very early on, we started to shift staff from M&A to our debt advisory team in Germany, to help monitor the market and to help our clients. Although the big wave of so-called restructuring mandates has not kicked off yet, it will surely come in the second half of the year."

As DC's DACH strategy indicates, many advisers in the private equity market have changed their services to adapt to current market conditions and for the mid-term demands of their clients. Codex Partners has seen an uptick in interest in its buy-and-build advisory services to its clients that go beyond its core offering, says partner at the firm Rüdiger Maaß: "We offer the buy-and-build services to our commercial due diligence clients, saying: 'You bought this company, so let's see if there are interesting ones in other areas.' As prices and multiples have come up, it is very expensive to buy in structured processes so more and more funds are interested. Either they already have a nucleus, or they are looking for one. We offer them buy-side support; identifying interesting industries, looking for interesting segments and companies on a shortlist and longlist, contacting the targets and supporting the process from the commercial side."

Cutting through the crisis
Due to financing constraints, dealflow and opportunities in the region are currently more evident for small-cap deals. Says Maaß: "There is still a lot of money in the market and funds are still looking for new targets. On the other hand, the bigger processes have been stopped generally. Many sponsors are looking for smaller processes and buy-and-build. They have not stopped buying, but the opportunities have become smaller."

This has been evidenced by a number of all-equity deals in recent weeks, ranging from Investcorp's $180m all-equity deal for Avira to smaller €20m EV deals for other businesses that GPs consider to be stable in spite of the crisis, including software-based consulting companies.

However, GPs that are nearing the end of their fund's investment period while looking to make new platform investments will also need to adapt to contend with a difficult fundraising climate in the medium term. One DACH region placement agent tells Unquote: "If you are a fund that is just supposed to start fundraising now, that is a fairly challenging exercise. There is some likelihood of being able to add an annex fund to your current fund, or making cross-fund investments, but raising a new fund now will be rather difficult. Longer holding periods and fund-life extensions are highly likely outcomes for funds fully invested pre-crisis, so GPs will be required to investigate into different transaction structures in order to provide support to portfolio companies."

Overall, local players do not anticipate a sudden return to action just because lockdowns are eased and the region has been comparably less affected than others. "There is still M&A activity ongoing, but clearly a lot will be after the summer," says DC's Jaecker. "We are starting to engage in concrete projects with some of our clients, as things are easing up in Germany, and we will launch projects again that we already had in hand before the crisis if we can justify it by the company's performance – where you can show what is purely the coronavirus effect and what is not. There is a lot of portfolio company analysis to be done, but people will soon have a clear look at their companies and see what has done well or badly, or whether they are still the best stakeholder under this environment. The recovery may only be in 2021, where deals come into the market that did not make it into 2020 – we may see 50% less activity this year in certain jurisdictions."

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• Topics
• DACH
• Investments
• Fundraising
• coronavirus