Lack of primary deals could hamper DACH growth

The outlook for the DACH market is good as the economy regains its strength following the financial crisis, but dealflow could be a problem, market experts say.

According to Palamon Partners' Holger Kleingarn, although many private equity companies are active in the market and ready to invest, there are problems. "A lot of funds are looking to invest but, aside from secondary sales from PE firms, we see some shortages in supply of businesses for sale."

This lack of primary dealflow comes at a time when the region's economy is resurgent. Unemployment is at a record low at the moment, the industrial segment is developing well and the retail sector is being driven by spending power. As far as private equity deal-doing is concerned, the volume of private equity buyouts and growth capital transactions in 2010 was almost back to 2005 levels, according to Private Equity Insight.

That said, primary buyout activity in 2011 has remained subdued with only secondary buyouts recording a slight increase – a continuation of the trend already observed throughout 2010.

It seems that companies in the region are not ready for investments from private equity funds just yet. According to Kleingarn, German entrepreneurs and owners, although more open than ever, are still slightly biased against private equity ownership, which makes proprietary dealflow so important in this market.

Consequently, investors are increasingly turning to other private equity owners to source deals, as Kleingarn notes: "We see secondary buyouts of good companies, where private equity players know each other well, and this is going to continue."

While acquiring companies from rivals might be an option for private equity funds, LPs are reportedly concerned about secondary buyouts, which are said to achieve lower returns and reduce company performance. However, a recent study from Golding Capital Partners has shown that these concerns were unjustified. In fact, the results confirmed that secondary buyouts can produce reasonable returns, while the operational value of companies only showed small differences comparing primary and secondary deals.

The small number of companies in the primary market might decrease the number of deals in the DACH region this year but with a strengthened economy, companies should perform well in 2011 and secondary buyouts will help maintain dealflow at current levels.

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• Topics
• DACH
• Buyouts
• Germany
• Austria
• Switzerland