German GPs deliver homogenous & robust returns, says Wega's Berthold

Harriet Bailey: How much confidence is there in the German market at present?

Sven Berthold: Confidence is fairly high at this point. The economy has done well in recent years, companies have recovered from their lows and profits are above pre-crisis levels. The quality of dealflow is good, albeit not abundant, and we have seen an increase in recent months. GPs have seen strong fundraisings and deal financing is available at attractive conditions. As well as this, transaction volume for buyouts is up compared to the first half of 2013. And all of this seems to be confirmed by the BVK Sentiment Index, which is at levels unseen over the past 10 years apart between 2006-2007 and briefly in 2011.

HB: What is the outlook for a German GP wishing to raise funds in the current environment?

SB: Generally speaking, the current fundraising environment is bifurcated. It's very accommodating for GPs with good track records but less high-performing groups can take a long time to raise capital.

For LPs, the task of securing allocation with very good GPs is not easy – I'd say there is a fight for allocation going on. LPs need to be proactive and position themselves very early in the fundraising cycle in order to secure their commitments. This is very similar to the 2005-2007 period. The strong performance shown by Germany and German GPs during the financial crisis means the country is an attractive destination for capital. But as most German GPs focus on the smaller Mittelstand, fund sizes aren't that large and they don't increase that much from fund to fund either. Demand outstrips supply and the very strong and fast fundraisings of some German GPs recently confirms this in my eyes.

HB: What are the criteria for your fund manager selection? Has that changed?

SB: We have always emphasised investing with experienced teams with robust track records, who seek value creation through growth and/or operational change as the main value drivers. Rather than the selection criteria changing, we have seen more pronounced shifts in our strategic allocation to private equity strategies and buyout fund size segments. Venture capital investments have been phased out giving more room to special situation and turnaround funds in our portfolio.

Furthermore, while 10 years ago we had started shifting into the small-cap space and emphasised this part of the market, today we target a more equally balanced mix of large-cap, mid-cap and small-cap funds.

HB: How have the German fund managers that you have invested in fared?

SB: Interestingly, in IRR terms, three of our top 10 best performing fund investments since inception are Germany-based. However, this statistic needs to be put in perspective, as some of the commitments were made in some very good vintage years. If we benchmarked the German funds we committed to against their European vintage peers, I'd say the performance is good, but not great. This observation is very much in line with all the other available data on German private equity performance relative to other European countries. Returns have been fairly homogenous in my mind, too. In the past, one might have said that performance has been somewhat boring, but today one would say that returns have been robust over time – an attractive feature in the eyes of many LPs!

 

Enjoyed reading this article? Meet more than 80 GPs and LPs at the annual unquote" DACH Private Equity Forum taking place on 7 October in Munich. For more information on the agenda and speakers confirmed, visit the website here.

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