Investment opportunities scant in Germany – Lyrique’s van Swaay

Katharina Semke: Are there enough opportunities to invest in funds in Germany?

Hans van Swaay: No, absolutely not. Germany is lagging behind the rest of Europe and is not pulling its weight in private equity. According to EVCA figures, Germany raised €1.78bn in 2014, France €7.2bn, the Netherlands €1.4bn and Norway €1.9bn. However, Germany is by far Europe's largest economy.

The reasons may be historical. Germany traditionally follows the Mittelstand approach and tries to keep a company in the family instead of selling it to private equity. There is an ingrained suspicion against anything finance-related. Germany also lacks a strong financial centre like Paris or London, where everything is concentrated in a few square kilometres. That is especially problematic for the financial side like M&A advice.

More recently, there are not many deals being done, they have fallen away. This is partly due to a very favourable climate for corporations to make deals. Their share prices are high and money-borrowing costs are low. Many of the larger corporates in the western world have also been very good at balance-sheet management over the last few years – much better than banks, and private equity for that matter.

KS: What strategies are you most keen to invest in for the DACH region at the moment?

HVS: In many sectors of private equity there is too much money chasing too few deals, so GPs end up buying companies from each other. We try to invest in places where there is little competition, where there is not enough money for quite a number of very good deals. For example, we have been investing in secondary collateralised loan obligations (CLO), which was a very niche, very small European market, at a time when nobody wanted CLOs.

We are currently with a group that buys pretty small, but profitable, service companies that are reasonably well run by an entrepreneur, but not ready for private equity yet. The companies don't have the systems in place and don't have the size. These guys are ready to do enough work to make it ready for private equity or for an institutional buyer.

Private equity is a bit lazy sometimes and wants to have ready-made deals with a nice ribbon tied around them by the M&A adviser. These guys take the stuff that doesn't have the ribbon around it and transform it. Suddenly you can put the red ribbon around it, people get very interested and you can sell it at a much higher price. We invest in that and it's going very well.

KS: The last two years have seen strong exits across Europe. Is it the same for your funds? Do you expect this trend to continue?

HVS: Yes, it's the same for us. At the moment, more money is going out of private equity than coming in. There has been a very favourable environment for exits with high stock market prices and very high prices nearly everywhere. Cheap credit and a general sense of optimism is also helpful.

Things will probably change in the next two years. Interest rates of five, six or seven percent are not unusual if you look back. Stock markets will be at lower multiples. When these things happen, the exits will dry up. But it will also mean better buying opportunities.

LS: The situation in Greece created uncertainty for all of Europe. Did this influence the way you invest?

HVS: No, Greece makes a lot of noise and very good headlines, but it doesn't count. The fear was that the crisis in Greece would trigger things in much bigger economies like Italy or France and that was scary. This did not happen. The EU made sure that a real crisis has at least been postponed for quite some time.

KS: As an active co-investor, how do you ensure that the GP you are working with offers quality deals?

HVS: Investing in a fund is like writing a blank cheque. The system in private equity is set in such a way that, as an LP, you really do not have influence. You should only give your money to a GP when you are convinced they will do a good job. You have no idea as to what it's going to be invested in. The only thing you have hopefully done is your analysis on the due diligence and be sure you found a good manager, one that you trust. That's the only thing you can do.

KS: How do you ensure a strong relationship with the GPs that you are co-investing with?

HVS: Basically the LP is a client to a supplier, the GP. The guys with the most money to spend are the most popular. It has little to do with the relationship. There is nothing wrong about that, but I think that some LPs are just kidding themselves if they think that because they are being wined and dined, they have a great relationship with their GPs. It's a fairly hard-nosed business. Those who have a lot of money and spend it are very popular, those who have little money or are not willing to spend it are not that popular.

KS: Are you optimistic about the next 12 months in the region? If so, why?

HVS: Things are going strong at the moment. Fundraising and exits are going well, so there will be momentum for at least another 6-12 months. However, in the next two or three years something will happen in the world economy, it can't go on like this. Prices will have to come down, economies may slow down, and interest rates will have to go up.

You don't have that many big private equity players in Germany. The big money comes from London. Therefore, if London gets hurt or Europe gets hurt, Germany gets hurt as well.

KS: What is your wish for German private equity?

HVS: I think one of the weaknesses in the German private equity market is legislation. For an outsider it is messy and it always changes. People don't know how the legislation will be next year. This might partially explain why there is less private equity in Germany than in other countries.

I think Germany would benefit a lot from simplifying its legal structures, especially the tax structures for private equity. The government would ideally leave it alone for the next 5-10 years. That would be enormously favourable.

To hear more from Hans van Swaay, and other leading figures in the DACH private equity market, book your place for the unquote" DACH Private Equity Forum, taking place in 20 October in Munich. Click here for more details. 

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