German PE assesses opportunities in crisis

The topic of dry powder was key at the Mergermarket Germany Forum on 14 October, especially given that many GPs have not been able to stick with their usual deployment plans in 2020, amid portfolio damage limitation and the uncertainty in company financials in the wake of the coronavirus crisis.

"What we found most obvious and most spectacular was the short halt of maybe two weeks at the end of March to mid-April – the market came to a literal standstill on the equity and debt side," said Marc Brugger, managing director at LFPE. "But there were deals done over the crisis, and meanwhile fully remote fundraising has been taking place, which we never would have expected in 2019. The gap between dry powder and invested capital will definitely increase in 2020, but we are no longer seeing the market in 'no-deal mode'."

Germany's family-owned Mittelstand businesses are likely to be a source of deal opportunities amid the uncertainty, said Inna Gehrt, partner and head of DACH at Mandarin Capital Partners: "We are seeing strong growth in terms of family-owned businesses that are trying to sell their companies; a lot of owners just don't know what will happen in the next year and when the pandemic will end, so they would rather try to sell their businesses now, while their valuation is more or less attractive."

The panellists also pointed to carve-outs as a potential source of deals, noting that although many were delayed or aborted in the first months of the crisis, many corporates remain under pressure to sell. In addition to highlighting Mittelstand businesses, Gehrt noted that companies with a "made in Germany" angle are becoming increasingly important.

Winners and losers
Sector-based market bifurcation has been a clear trend in Germany and beyond in the wake of the coronavirus crisis. Andreas Bösenberg, CEO of Nord Holding, explained how this is playing out in Germany: "Software and healthcare valuations are increasing, but the automotive sector is not moving at all, while mechanical engineering valuations, for example, are coming down. The market is differentiating more and more by the quality of assets. Healthcare, software and TMT are seen as safe havens, people are increasingly allocating money there. For value investments it seems too early still."

Nils Koffka, a partner at Allen & Overy, identified four categories of companies: businesses that have benefited through the pandemic, those that have weathered the storm relatively unscathed; those that were the target of private equity deals that did not come to fruition in 2019; and finally those companies that have suffered during the coronavirus pandemic, many of which are currently backed by government money. Such businesses are likely to be restructuring cases, he said: "In terms of sectors, consumer to some extent is winning, but this can be difficult for private equity to approach, since the question here is 'can I rely on the 2020 EBITDA numbers?' – the growth could be a one-off. For example, if someone bought a bike this year, they don't need another one next year."

Speaking on those businesses that have been neither losers nor winners, but have come through the crisis quite well, Koffka said: "Those assets are coming to the market now and we see a lot of investors going after those, since they are Covid-19-resistant and don't have the problems that I have mentioned."

Koffka's other category was deals that did not work out in 2019 returning, which could provide another source of opportunities for sponsors: "Every year you have deals that don't succeed. Many investors who have previously looked at these know the company very well by this stage and if such businesses have managed the first few months of the crisis well, they might become an interesting target now."

Preparing for 2021
The panellists acknowledged that special situations investors are likely to see their deal opportunities increasing in the coming months. Brugger noted that distressed M&A specialists are not the only investors who stand to benefit: "We are seeing more and more investors picking up distressed deals, so there could be a suitable buyer for almost every asset in the market. The sellers are becoming more and more sophisticated, and even professional PE funds are sellers in this market, which really keeps the market going."

Koffka added that the anticipated wave of distressed investments has not yet broken, due to the amount of government money that has been used to support businesses since the start of the pandemic, as well as the suspension of some aspects of German insolvency law. However, he said that the market is preparing for this: "I would not be surprised if some of the more opportunistic PE funds have sharpened their instruments and are going to do business more intensively in this area in H1 2021 when German insolvency rules are back in force."

Although the panellists were cautiously optimistic about how the market is developing, Bösenberg said: "It is getting more difficult to find growth in this current environment. Buy-and-build is really the theme of the day to find growth – not only in smaller buy-and-build roll-up cases, but also for mid-market companies. But we are still in the crisis – this is a marathon and we are not out of the woods yet."

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• Topics
• DACH
• Investments
• GPs
• Germany