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Buy-outs of small and medium-sized German enterprises emerge from the doldrums

Just E1.5bn of private equity is currently invested in the German mid-market, compared to E6bn in the UK. For private equity firms with a genuine experience of this market, this means that there are real opportunities to realise interesting investments with expected returns well above the European average, according to Global Vision.

It is not the big shots like Daimler Chrysler, Deutsche Bank or Siemens who contribute most to the economic power of Germany. The real strength is based on the small and medium- sized enterprises, the numerous no-names whose individual existence is only known to sector insiders. 80 per cent of all the people subjected to social insurance contribution are employed by small and medium- sized businesses, which also generate 70 per cent of the new jobs in Germany. (Quelle: Mittelstandsmonitor des Bonner Instituts für Mittelstandsforschung).

The supporting pillar of the German economy first of all is the 30,000 businesses with an annual turnover between E15m to E300m. It is precisely this pillar of the German economy, which faces a whole string of vital challenges. To survive and prosper in the changing environment above all shareholders' capital is necessary.

Equity is required: Higher equity ratios due to Basel II regulations
Businesses are forced to access new sources of financing in the form of shareholders' capital in order to adapt the structure of their balance sheets to the requirements of the Basel II regulations and thus remain credit-worthy in the long run. In view of the international competitiveness this is a particular urgent matter if one compares the equity ratio in German businesses (14 per cent) with the average ratio in European (35 per cent) or even US (45 per cent) companies. Therefore a McKinsey report finds: 'Small and medium-sized businesses are short of E100bn, a gap which has to be closed.'

Equity is necessary: Implementing innovation and globalization
The instance of the eastward enlargement of Europe shows clearly: The capacity of the small and medium-sized enterprises to compete on an international level requires both a high degree of capital expenditure into R&D and cross border links to take advantage of favourable locations. By virtue of the higher risk also these investments are increasingly to be underlaid with shareholders' equity.

Equity is in demand: Financing of enterprise successions and corporate spin-offs
Within the next few years the third post war generation is to take over control in the family-run businesses. Facing the difficult current conditions many heirs will shy at the succession and prefer - if possible - to sell the business. The third party acquisition of such companies has to be financed. A similar situation arises with the financing of corporate spin-offs. Large corporations in Germany increasingly follow into the steps of US companies at the beginning of the 1990's. They focus on their core business in order to boost equity return and sell-off businesses unrelated to their core activities.

Only a few buyout transactions involving small and medium-sized enterprises have occurred so far
E60bn was invested in buyouts in the whole of Europe in 2003 and E9bn in Germany alone. Large and known transaction beyond 1 bn € in value like MTU, ProSiebenSat1, Kabel Deutschland and Premiere sum up to the largest portion of that amount and are usually financed by Anglo-Saxon investors or multi-national syndicates. In the large-cap segment of the market investors abound and plenty of foreign capital is available and thus the competition is correspondingly high.

But what is the situation for middle-sized companies with transaction values in the range of E15m to E200m? An analysis of GLOBAL VISION AG Private Equity Partners shows clearly that the German private equity market has a lot of catching-up to do: In Germany the amount of private equity invested in this segment was a mere E1.5bn compared to E6bn in the United Kingdom. Comparing the investments by number the result is equally glaring: Approximately 25 investments were done in Germany and about 120 in the United Kingdom. More specifically surprisingly few transactions involving family-owned enterprises took place in this country. Correspondingly only very limited sums of domestic capital are available for investment.

Exceptionally high returns to be expected from the 'emerging' German private equity market
'Market forces do not leave an alternative to the breaking up of the established structures. We are now at the beginning of a process which will eventually lead to a considerable increase in the number of transactions in Germany', says Dieter Brender, managing partner of GLOBAL VISION AG Private Equity Partners in Frankfurt. His company, one of the leading German fund-of-funds investors, expects the volume of transactions in the E15m to E200m size range to rise from approximately 30 transactions per year to something like 50 per year within the next few years. For investors operating in this market and having a long standing experience in Germany - and there are only a few because of the Anglo-Saxon predominance so far - this opens up the opportunity to realize interesting investments with expected returns well above the European average of private equity engagements.

Global Vision Private Equity Partners is a leading fund-of-funds group dedicated to investing in private equity. It focuses on all stages and currently manages a total volume of more than EUR 250 million.