Private Equity A Flood of Capital Ideas

The private equity sector in Germany is roaring for the first time since the financial meltdown with record sums in play and mid-sized companies attracting attention.
Private equity firms are on a shopping spree in Germany.

The “titans” will meet this week in Berlin.

At least, that’s what it says in the announcement for the “Super Return Conference,” where the legends of the private equity sector such as Carlyle co-founder David Rubenstein and Terra Firma chairman Guy Hands will appear.

Mutual back-patting will be on the agenda, since the sector is flourishing once again as it did before the financial crisis.

The mood in Germany, too, hasn’t been this upbeat in a long time.

The business climate index measured by BVK, the association of German private equity and venture capital companies, and the German government-owned development bank KfW, rose to a three-year high in the fourth quarter of 2014. The large influx of fresh cash and prospects of lucrative sales or a flotation of acquired companies are making investors upbeat.

“The mood of private equity investors has improved over the course of the year,” said Jörg Zeuner, chief economist at KfW. “Especially the early-stage investors in young, innovative companies are more satisfied.”

Multiple billion dollar transactions, like in the U.S., will likely remain the exception. Gerd Sievers, partner, Roland Berger

Ulrike Hinrichs, executive member of the BVK Board, added there is confidence within the sector that an increase in investments will continue through 2015.

Low interest rates at central banks are driving the record influx of new funds into the private equity sector. Institutional investors are desperately searching for lucrative returns no longer to be found in government bonds while the danger of setbacks always lurks on the stock market.

Private equity funds buy companies, optimize the holdings and sell them off, on average, after four to seven years of ownership. Buyers primarily come from within the industry or are other financial investors. The best-case scenario is to bring investments onto the stock market. Returns on invested capital are almost always in the double-digit range.

A wise old saying among bankers says “when it’s raining porridge, you have to hold out your spoon,” and it's the investment managers who are embracing it right now. Never before have so many funds been so active in collecting money from so many institutional investors. According to Palico, the private equity fund, online marketplace and service provider, a record number of a good 2,200 funds are busy taking in over €702.5 billion ($800 billion) from pension funds, insurance companies and asset managers.

Currently, the private equity sector already is administrating an astronomically high amount of €1.05 trillion.

The glut of capital is likely to fuel the mergers and acquisitions market in the coming months. “We are expecting an increase in larger deals in Europe over last year,” said Gerd Sievers, a partner at the corporate consultancy Roland Berger, though he adds, “Multiple billion dollar transactions, like in the U.S., will likely remain the exception.”

Turnover at leading investment banks in connection with private equity at the moment amounts to about a quarter of total turnover in the field of classic investment banking, says Sven Baumann, an investment banker at Citibank. In 2014, according to industry estimates, it was only around 18 percent.

Before the financial crisis, low interest rates enticed companies to buy at inflated prices using aggressive financing methods.

Among the larger acquisitions are financial investor EQT’s purchase of the Siemens hearing aids division for €2.4 billion, and the sale of the Gea heat exchangers business to Triton for €1.8 billion.

Handelsblatt has obtained a copy of a study by Roland Berger showing almost two-thirds of investment managers contacted anticipate more transactions in 2015 than in 2014, with the majority of transactions in the hotly contested mid-sized company segment ranging up to €250 million. For example, the financial investor Afinum recently acquired socks manufacturer Camano from the family owner.

Managers are being driven by fear that the supply of attractive takeover objects won’t keep pace with the swelling pools of investment cash, which will drive up prices. BVK and KfW both note private equity managers are “visibly dissatisfied” with the starting prices.

The sector shouldn’t be tempted to repeat mistakes made before the financial crisis, said Walter Henle, a partner with the international law firm Taylor Wessing. Low interest rates enticed companies to buy at inflated prices using aggressive financing methods.

Experts worry current conditions increasingly might lead to managers selling their investments to each other. This means the supply of new deals in 2015 likely will come largely from investors themselves. The influx of fresh blood from outside is missing.


Peter Köhler heads Handelsblatt's banking team in Frankfurt. Robert Landgraf is the deputy head of Handelsblatt's finance section and is based in Frankfurt. To contact the authors: [email protected], [email protected].