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Buy-outs of small and medium-sized German enterprises emerge from the doldrums
14/05/2004. Source:Global Vision . Dr. Dieter Brender
 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.
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