The potential impact of upcoming German elections

A few years ago it would have been impossible to discuss economics and politics without mentioning private equity. The former head of the socialist and second major political party SPD, Franz Müntefering, famously compared GPs to locusts sparking huge debate over the disadvantages of private equity and eternally branding the sector.

Black-yellow support
Germany is currently ruled by a coalition between the Christian-conservative CDU/CSU (Chancellor Angela Merkel's party), and the liberal FDP. When forming the government in 2009, both parties sought to improve the regulatory framework for private equity. Ulrike Hinrichs, CEO at the Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK), says: "Overall, I think the BVK can be content with the black-yellow coalition. All possible introductions of regulations and laws that would lead to a worsening of the situation for private equity firms in Germany have not been introduced over the last few years. If we saw a revival of the CDU/FDP coalition, we, in the private equity sector, would be happy."

Competing for office for the third time, Merkel remains popular – many Germans attribute the nation's strong economy to her party's efforts. It is therefore not surprising her party pulled in around 40% of votes in recent polls.

In present surveys, the liberal party FDP stands between 5-6%, which is just enough to gain seats in parliament, raising question marks over the continuation of the present government. The FDP wants a polished regulatory framework for the private equity sector to improve investment conditions, as it sees private equity as a valuable asset to Germany's economy.

Voters want venture
Venture capital has gained popularity as politicians realise the trendy nature of the industry and its positive influence on the nation's image as a home of entrepreneurship. For example, current vice-chancellor and German minister of economics Philipp Rösler, FDP, is considering creating a new stock market tier to help finance start-ups.

"The importance of venture for the economy is imminent when we look back at all the politicians across a range of political parties in Germany, who started to take a special interest in the start-up scene in the run-up to the election," Olaf Jacobi, partner at German venture capital firm Target Partners, says. "The start-up scene in Germany is flourishing; why would anybody threaten this situation?"

Hinrichs agrees: "It is obvious that the current government – alongside many other politicians – has discovered risk capital as an interesting area full of possibilities."

Übermutter: Merkel's biggest foe
According to local media, a coalition between both major parties – the SPD and CDU/CSU – is expected to be the most likely outcome of this election, but how serious a threat is the SPD (and with it Merkel's biggest rival: SPD chancellor-candidate Peer Steinbrück) to German private equity?

From 2005 to 2009, the CDU/CSU teamed up with the SPD. Steinbrück became finance minister, introducing measures for the deregulation of markets in Germany. Likely to be one of the reasons for the calmness of German GPs, this highlights the possibility of SPD's struggle to impose its party lines in a coalition with the centrist-conservative CDU/CSU as well as Steinbrück's preference for the financial market.

Torsten Grede, spokesperson of Deutsche Beteiligung AG's (DBAG) board of management, is convinced that no party will worsen the conditions for private equity in Germany. "I am expecting to see the new chancellor being aware of the importance of private capital in Germany," he says. "Even a government led by the SPD will have to acknowledge that private equity is necessary for a competitive and healthy economy."

Arguably, a sole SPD/Die Grünen coalition may even be promising for private equity. During the 2002 to 2005 coalition, chancellor Gerhard Schröder kick-started the founding of High-Tech Gründerfonds, a partnership of the German ministry of economics and technology, KfW banking group and six corporations. Surprisingly, Schröder was a socialist leading the country together with the green party – usually the kind of coalition that makes GPs' toe nails curl up.

Who's scared of the lefties?
However, the idea of an entirely left-wing coalition causes even the most relaxed private equity supporter to wince, especially since the SPD now seems to have revived its socialist roots, calling for tougher financial market regulations. Crucially, the party, reaching 25% of votes in recent polls, wants to prevent the relocation of funds to offshore territories.

A coalition between the SPD, the green party and Die Linke would threaten the private equity sector in Germany with an almost certain realisation of severe regulations for financial markets.

Hinrichs says: "If we see a coalition of SPD/Grüne/Linke then it is likely the parties' taxation plans will be made reality and not only the private equity sector but the entire economy would suffer in return. Nobody in this sector would want that, of course, but I also think it is very unlikely to happen."

Many GPs believe all parties have acknowledged private equity as a valuable asset to the German economy – except the left-wing party Die Linke, worryingly reaching 10% in the polls. But, fortunately, nobody seems keen on partnering with them. The party is a strong supporter of the new AIFMD and wants to see even more regulation in the private equity sector. It even goes as far as to demand the dissolution of private equity firms and hedge funds.

However, many GPs doubt Die Linke will win and remain markedly confident. But, if the left-wing parties manage to win over the Germans, Jacobi predicts a potential negative impact on available capital. "If we saw another increase on taxes, then we would also witness a flight of capital providers. If you introduce new taxation laws that make it more difficult for limited partners to invest in Germany, then we will see a decreasing supply of equity. That is not desirable for any political or economic position," he adds.

Germany's general partners are confident that politicians across all parties recognise the importance of private equity to the economy and will continue to do so in the future. Grede says: "We need to maintain the success and competitiveness of Germany on an international scale through securing private capital for small and medium enterprises. That needs to be kept in mind when making regulatory decisions about the market – no matter which party wins the election."

It remains to be seen if the German voters want a third term with centrist-conservative Merkel or if GPs may find themselves waking up to an unexpected nightmare of socialist regulation frenzy. However, at the moment, the CDU/CSU seems to be as popular as ever, with the party winning an overall majority of around 48% in Bavarian regional elections over the weekend.

What is clear is the confidence of private equity practitioners in Germany that their industry will be protected whoever takes power.

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• Topics
• DACH
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• Deutsche Beteiligungs AG
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