German turnaround deals remain elusive

The German turnaround market is far more active than the traditional Mittelstand buyout industry, Unigestion investment director in private assets Bruno Mory told unquote" last month. Halfway through the five-year evaluation period for the reformed German insolvency law, is it beginning to have a positive effect on the sector?

A cursory glance reveals both hits and misses for private equity funds. Deutsche Beteiligungs AG (DBAG) acquired insolvent baker De Mäkelbörger via portfolio company Dahlewitzer Landbäckerei in July, while HgCapital turned around its own portfolio company Schleich, a toy manufacturer, following a period of stagnation in 2011-2012. A transformed management team and new CEO saw both a 7% revenue increase and a sale to Ardian in May for €220m.

Furthermore, after only nine months on the road, Quantum Capital Partners closed its debut turnaround fund on its €55m hard-cap earlier this month. "Dealflow-wise it's pretty strong in the segment we are in," says Tilman Richter, director at Quantum. "There is strong dealflow from the large conglomerates, which continue their strategic portfolio reviews and divest mid-sized businesses that either require a financial turnaround or are not part of their core strategy. And we're not focused only on Germany – we look for deals throughout western Europe."

However, it has not all been plain sailing. In May, it was announced that Paragon Partners had signed a preliminary agreement to buy insolvent bookstore Weltbild. Fast-forward two months and Paragon was thrown overboard in favour of specialist restructuring firm Droege Group. It took even less time for HIG Capital to be pipped to the post when vying for the Nürburgring; having registered with the German anti-trust authorities, the private equity house was outbid by motorsport industry supplier Capricorn Group a week later.

White noise
"We're indeed seeing more transaction propositions than in the past, but a lot are businesses of very poor quality that we don't think will make it," says Christian Hollenberg, co-founder of Perusa Partners, a lower mid-market fund focusing on special situations.

Jürgen Zapf, managing director and head of the German transaction advisory group at Alvarez & Marsal, is also seeing an increase in offerings rather than a jump in completed deals: "We haven't seen as many turnaround deals in the last two years, but the cases are consistently increasing, particularly in the small-cap market. This makes up the bulk of the companies on offer at the moment but they are not of interest to distressed funds."

Indeed, the German turnaround market is suffering the supply/demand imbalance bemoaned by buyout houses. "We're still missing the underlying larger distressed companies. There is a lot of money out there but, in general, very few opportunities crystallise into a transaction," says Zapf.

Is it then a seller's market? Corporates are acutely aware of the dearth of investment opportunities on the market and are hoping they might succeed. "I don't think the turnaround market is growing, but it's not shrinking either, " says Hollenberg. "The thing that is changing is the white noise around it."

Sluggish ESUG
So what of the 2012 reforms to the German insolvency law ESUG, the Act for Further Facilitation of the Reorganisation of Enterprises? While it has lain somewhat dormant during the previous two-and-a-half years, Zapf says mid-term prospects for turnarounds are good, with funds having been able to use the time to get to grips with the regulations and gain a greater understanding of any potential pitfalls: "The turnaround community says it is a good procedure. But ESUG is still a more cumbersome and time-consuming process than in the US or UK, typically taking three times as long here. And to compare it to [the US Bankruptcy Code] Chapter 11, where parties deliberately get lots of information, it isn't as easy as that in Germany. But it has been proven to work."

Nevertheless, the lack of local assets poses a problem for dedicated vehicles and turnaround investors, but exploring those markets that lay at the epicentre of the financial crisis could be one avenue of pursuit. "Spain and Italy attract a lot of interest," says Zapf. "Some funds think carefully about tapping into Greece. But very few transactions actually happen."

Hollenberg, on the other hand, suggests the turnaround market in the Nordic region is a better bet: "We found the broad private equity market competitive for turn-key, profitable companies, but less competitive than Germany for some of the typical turnaround investments that we do. It's at a stage where the German market was 10 or 15 years ago."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• DACH
• Turnaround/Special Situations
• German Turnarounds
• Germany
• Turnarounds
• HIG Capital
• Deutsche Beteiligungs AG
• Paragon Partners GmbH
• Perusa GmbH
• Top story