Refinancings surge in Germany

Katharina Semke
23 February 2016

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New figures show German GPs are opting for refinancings rather than exits, highlighting the increasing difficulty of valuing assets in an uncertain market. Katharina Semke reports

For the first time, Germany has seen more refinancings and recaps than new buyouts. Could this increasing tendency to refinance existing investments be a symptom of a weakening exit market?

According to Altium's MidCapMonitor for 2015, the share of private-equity-backed refinancings and recaps was 44% in 2015, up from 38% in 2014. In comparison, the number of new financings decreased from 48% to 43% in the same period. This situation came about due to a decreasing number of deals (Germany went from 91 buyouts in 2011 to 57 in 2015), but the data indicates that a fair number of GPs also opted to continue to hold assets in 2015 – instead of exiting after the typical three-to-four-year investment period. The MidCapMonitor report suggests refinancings often occurred after failed deals, where GP and buyer could not agree on a price.

Altium's list of German recaps includes Cordenka. Chequers Capital acquired the producer of industrial rayon from CVC in December 2011. According to private equity custom, the asset would be ripe for exit; however, Chequers opted for a recap via senior debt financing by Commerzbank, IKB, NIBC and BKB Bank in Q4 2015. Another candidate is Geka. The cosmetic packaging producer was acquired by 3i from mid-market investor Halder in February 2012. 3i also opted for a recap in Q4 2015 – in a club deal comprising Commerzbank, Bayern LB, LBBW, SEB and Bank of Ireland.

In the European Union, the assessment of business plans has recently become more complex. This leads to different results regarding the asset value on the sides of buyer and seller" – Markus Ehrler, Marlborough Partners

German GPs, as with investors all over the world, are trying to cash in on the rising valuations seen in recent years – and sensibly, they seem reluctant to accept low offers. However, according to Markus Ehrler, a partner at debt advisory firm Marlborough Partners, recent conditions make it harder to agree on prices: "In the European Union, the assessment of business plans has recently become more complex. This leads to different results regarding the asset value on the sides of buyer and seller."

Departure delay
It seems some German GPs are therefore halting their sale efforts and opting instead for refinancings.

Numbers from unquote" data also point toward higher price expectations among GPs. German investors turn more and more to trade buyers, who are willing to pay higher entry multiples compared to private equity buyers. While the DACH region saw a lower number of exits in 2015 compared to the years before, falling from 129 to 109, the most common exit type by far was trade sales, of which the DACH region witnessed 22 in 2015. In comparison, the number of secondary buyouts across all of Europe rose slightly from 2014 to 2015, while they remained at a steady 15 in DACH.

It has long been predicted German GPs would increasingly turn to alternative lenders for debt to support new deals as well as refinancings. Despite those predictions, the banks have strongly defended their market position. Thorsten Weber, a director in Altium's Frankfurt office, explains their popularity: "Following the excellent liquidity in the German market, banks offer attractive financing packages. However, debt funds could be an alternative for GPs that seek maximum leverage and flexibility or in time-critical situations."

Ehrler has witnessed GPs turning to bank club deals when they seek a recap without having further growth ambitions, while they turn to debt funds when looking to achieve more growth. However, the MidCapMonitor report recognises an honest effort by the country's banks to remain appealing for GPs by attempting to compete with covenant‐loose "term B only" loans, even for debt amounts of €100m and below.

Given the increased options for German GPs when it comes to sourcing debt, coupled with increasing levels of uncertainty, it is no bad thing to see more refinancings than exits; the basic principle of private equity is to reap the most value at exit. However, a key factor to bear in mind in terms of this development is the longer holding periods, which will have an impact on IRRs. But, given the increasing competitiveness of the German debt market for private equity-backed assets, if GPs are taking some money off the table when carrying out refinancings, then the effect on IRRs is lessened.