Family offices pose competitive threat to German GPs

While many in Europe worry that a capital overhang is driving pricing up – especially now with an unprecedented number of funds trying to deploy capital as they near the end of their investment periods – Germany may be suffering a capital shortage.

A relative dearth of German funds raised in the last few years – less than €1bn raised in both 2010 and 2011, rising a bit to €1.6bn last year – has improved in 2013, with six primary funds raised by German GPs so far worth more than €4.5bn according to unquote" data.

But there remains room for more, especially given €3.3bn of this is accounted for by Triton's latest effort. Between 2008-2012 DACH accounted for a fifth of all investments; behind only the UK at 26%, according to stats from BVK presented by Dr Peter Guellmann, BVK deputy chairman and managing director at NRW Bank. But DACH fundraising in that time accounted for just 9% of Europe, against 50% in the UK and 14% in France. "Given its size and economic resilience, Germany's relatively low fundraising success stands out," Guellmann said, speaking this morning at the eighth annual unquote" DACH Private Equity Forum.

A relative shortage of funding in Germany means foreign competitive threats are very real

This means international investors are increasingly significant in Germany: in 2011, 64% of all investments in the country were made by foreign investment firms – this rose to 74% in 2012.

Indeed much of it has focused on large houses backing German businesses, for example Springer Science, Ista, Ceramtec and Grohe this year. There may be, according to Guellmann, another handful on the cards, "though the competition for private equity funds will be intense and so many of these may go to trade."

Family offices are also posing a fresh threat to private equity firms in deals. "We've seen family offices five or six times now in processes. Their returns expectations are lower than those of institutional investors and they do less diligence, so it is dangerous competition," says Marc Thiery, managing partner at DPE. "They come in as rogue traders and do deals within 10 days. We don't like it if they show up on a deal," he says.

Thiery's sentiment is backed up by Dr Hanno Schmidt-Gothan, managing director at Perusa. "They tend to offer a 20% increase on pricing."

Sovereign wealth funds (SWF) are less of a competitive threat despite a clear desire to be more involved in directs. A lack of a local presence is proving cumbersome, according to Mandarin Capital's Alberto Forchielli: "Investing with a SWF can be tough, as it takes us longer to explain things to firms with no team on the ground. They tend to come into a deal late and pay a very full price."

Their success seems limited to co-investing for the time being, according to Florian Demleitner, senior vice president at Partners Group: "They are very slow in doing directs but pushing an increasing amount for co-investment."

On the venture side of things, the story is more upbeat. "German VC is making a U-turn and the first half of 2013 was the best half-year result since early 2011 (in terms of deal doing). This gives me hope, though it remains to be seen whether it's a trend reversal," said Guellmann.

Challenges remain, though, namely the aforementioned capital shortage: 70% of the VC member firms of BVK have less than €100m capital under management. "It's been impossible to meet the demand for VC in Germany for some time as a result," Guellmann said.

The upside to this is that those that do have capital to deploy are well placed. "The valuations remain low since there is not too much money chasing these deals," said Rainer Strohmenger, general partner at Wellington Partners.

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• Topics
• DACH
• Germany
• BVK
• Perusa GmbH
• Mandarin Capital Management SA
• Partners Group
• Wellington Partners
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