German activity sluggish despite mega-deals

Carmen Reichman
29 April 2013

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CVC’s €3bn buy-back of Ista this month caused much excitement about German private equity in 2013, though a deeper look at the figures reveals that Germany’s private equity industry had got off to a bad start this year.

Germany sealed only 10 buyout deals in Q1 2013, compared to 14 deals in the same period in 2012 and 25 deals in 2011, according to unquote" data.

"Q1 dealflow activity was very weak," says Sascha Pfeiffer, managing director at Altium Capital (pictured). However, this came as no surprise to the industry. Pfeiffer explains: "There's a simple reason for the lack of activity in that the euro crisis last summer and autumn caused widespread uncertainty on the market. Investors pulled the brakes and then didn't start any new projects towards the end of the year, resulting in a three-to-four month gap in the investment cycle."

Despite the bad start, Pfeiffer's market prognosis remains positive: "I believe Q2 will see an uptick, particularly in the growth sectors, and the summer will be relatively normal. The financial environment is good at the moment, the banks have recovered and are lending, the macroeconomic uncertainty has disappeared – 2013 is looking good." Pfeiffer refers to the relatively large number of pre-crisis deals that have yet to be divested and should be surfacing at some point in the near future. According to unquote" data, 118 buyouts were completed in 2007 alone, but only 155 exits from buyouts were seen from 2009-2012 combined.

Of the number of deals that are anticipated in Germany, the bulk of the activity will fall into the €30-300m EV range, predicts Pfeiffer, while most mid-market deals will be SBOs. This was echoed in a survey carried out by the German Private Equity and Venture Capital Association BVK, which found that 71% of interviewed GPs thought one of the most important sources of dealflow in 2013 would be SBOs, followed by family businesses (64%), growth capital (49%) and carve-outs (47%).

Although mid-cap values are expected to increase, opinions remain divided over any meaningful uptick in large-cap deals in the country, particularly with regards to DAX carve-outs. While media reports have long been speculating that Germany could indeed see mega-deals revived, fuelled by SBOs such as Ista's and efforts to refocus DAX-listed companies, industry veterans discount the validity of mega-deal volumes in relation to the wider market picture.

"We believe that deals valued at more than €1bn will continue to be scarce, as was the case last year. There should be a handful of deals over the course of the year, any more than that would be surprising," says Ulrike Hinrichs, managing director of the BVK. She adds: "The experience and expertise of German GPs in particular lie in the Mittelstand, which is a very successful market segment in Germany. Currently German funds lack the fire power for mega-deals and we believe it will be a long time before there's any meaningful shift towards mega-funds in Germany."