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Unquote
  • DACH

Germany: Generational shift the answer to cultural conundrum

As dealflow in Germany remains subdued a new generation is charged with bringing about change
  • Alice Murray and Katharina Semke
  • 30 October 2015
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As German dealflow remains subdued and debates ramble on over local GPs’ ability to crack the Mittlestand, a possible explanation for the relative under-penetration of private equity in Germany could be down to its culture. Katharina Semke and Alice Murray report

Panellists at the DACH Private Equity Forum, held in Munich in September, discussing causes for Germany's continually underwhelming deal volumes, agreed that the country's conservative nature could be one of the main factors. Mark Nicolson, partner at SL Capital, said: "There is a slower deal pace in Germany, which feeds into the more conservative nature of the country. Private equity firms in Germany could be braver and could consider other strategies such as minorities."

Nicolson went on to highlight key differences between German and UK private equity houses when it comes to origination efforts. A notable contrast is that UK houses are more likely to have good deal sourcing engines, with entire teams focused purely on finding suitable targets using large databases. He said that, while some German players do this, "it is disappointing to hear that some managers won't do their own sourcing because they assume the deal will go into a process anyway".

While the majority of targeted companies are likely to fall into a process after receiving attention from private equity firms, Nicolson makes a compelling argument when looking at how UK managers treat these situations: if a deal does go into a process, UK GPs will have an information advantage and are more likely to win the auction.

CapVis partner Andreas Simon agreed, saying that German GPs are more conservative and are pickier over management teams. Furthermore, he wondered if German houses are too polite to directly target management teams. "It is much more difficult in the German market; management teams are much more secretive, whereas in the UK it's all part of the game."

To add to this sentiment, Nicolson also pointed out that in the UK, management teams and business owners have a far greater awareness of private equity and typically receive much larger equity stakes in buyout situations. "German GPs should be more aggressive," he said. "There are lots of opportunities in the lower-mid-market and we don't see enough managers or activity there."

Nicolson's comments resonated with those of Peter Hammermann, managing director of Equistone, who believes the Mittelstand has always been open to private equity: "This has been on the table for 30 years - it has always been open, but not in a way people have wanted. The Mittelstand will continue to remain opportunity-driven. If people can see how private equity can work positively, the more opportunities will arise and so will the understanding that the right partner can be helpful and constructive."

The next generation
However, for Sonya Pauls, partner at King & Wood Mallesons, the outlook is very bright in Germany, especially for newer teams coming through - those spinning out of well-established houses. "We are seeing a good number of teams with good track records, especially in terms of sourcing proprietary deals across all sectors."

So, perhaps the solution to Germany's dealflow woes could lie in the next generation, not only of private equity firms, but also of entrepreneurs. This appears to be the case, according to Vittorio Pignatti Morano, chairman of Trilantic Capital Partners, who sees a shift in mentality, which is slowly starting to benefit private equity: "In Germany, like the rest of Europe, the over-50s have a language barrier and aversion to travel. The younger generation have done a couple of years abroad and they are much more aware of the positives and negatives of international capital. I see a more sophisticated younger generation."

While a generational shift is likely to improve deal volumes in Germany, in the short term, local houses could be doing more to improve the current situation. The most vital is to better educate German management teams and increase awareness of the benefits of private equity. If a more positive attitude toward the industry could be developed, then German GPs could be more aggressive in their deal sourcing efforts, as pitches will more likely fall on more receptive ears.

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  • Aberdeen Standard Investments
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