German funds: The LPs' verdict

In September, unquote" spoke to Christian Böhler, principal at Akina Partners; Sven Berthold (pictured), senior investment manager at WEGA support GmbH; Katharina Lichtner, managing director of Capital Dynamics; and Michael Lindauer, managing director of Allianz Capital Partners.

unquote": How does Germany compare to other markets you're investing in?

Sven Berthold: Germany is one of the few European countries investors seem to focus on these days. From a macroeconomic point of view, it has done pretty well ­ and the Mittelstand in particular has proven to be very competitive globally. Investors clearly find this attractive.

From an investor point of view, it has not been easy to reap this potential in full though. The often anticipated generational handover never took place on a scale offering private equity funds elevated levels of dealflow and a certain degree of scepticism towards the private equity model remains within the entrepreneurial community. As a result, we haven't experienced the same euphoria for private equity that took place in some other European markets.

And yet local GPs have managed to establish themselves over the last 10 years or so and returns have been very robust. There is much more of an institutional GP base to invest in nowadays.

unquote": What has changed in your fund manager selection process?

Michael Lindauer: With fund manager teams changing with higher velocity, track records are losing their relevance more and more. Therefore, the current portfolio is the closest an investor can get in terms of considering future performance, so that is very important to us.

Against the background of changes in the private equity landscape and strategic preferences, we have also become more selective with regard to re-upping with fund managers. But overall, our selection process has not really changed over the past few years, we have always considered ourselves to be quite rigorous.

unquote": What are you looking for in T&Cs nowadays?

Christian Böhler: If a fund is heavily oversubscribed, the negotiation power remains with the GP. But given that nowadays only about 5% of GPs fundraising find themselves exceeding their targets, LPs have a much stronger position for negotiation.

We look at a few things; firstly, corporate governance rights, which are implemented more strongly, but with typically lower thresholds. And then we consider transparency reporting, which is even more important. We want reporting within three or four weeks, not months.

Another point is fund size. We have become extremely restrictive; we give a cap on the fund size we will invest in, and if it is too large we won't invest.

If we act as a cornerstone investor, or one of a very small group with a large ticket that comes in at a first close, we would consider negotiation of a reward, which could be a discount on the management fee or special co-investment rights. We have always asked for those sorts of things historically if we found ourselves in the right sort of negotiation position - nothing has changed there. But those sorts of situations are arising more frequently as fundraising gets harder.

unquote": What expectations do you have for returns in the current vintage?

Katharina Lichtner: If a fund does okay, you have a guaranteed return of 8%. What other asset class offers that? Industry standard is to offer 20% but in reality we're looking for public market out-performance of 400bp to 600bp.

Now is actually a good time to invest as we expect better returns from investments made today than from those made between 2005-2008. Markets are down now and marginal deals are no longer happening. Historically, those 2-3 vintage years following an economic crisis have always shown very strong performance.

Read the four separate interviews in full in unquote's latest Germany Report, available to download HERE.

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