Private Equity The ‘Locusts’ Are Back

Flush with cash waiting to be invested, American and British private equity firms will target German companies this year. The recent bids for drugs group Stada are only the start, managers say.
KKR headquarters in New York City. The U.S. investor is buying into consumer research group GfK with an investment of around €300 million. Photo: DPA

Berlin is getting ready to host the world’s biggest meeting of financial investors at the SuperReturn International fair, which starts on February 27. Some 2,000 investment managers, lawyers and lobbyists will discuss the outlook of the private equity sector.

It’s looking decidedly rosy. In fact, financial investors have never had as much money at their disposal as they do now. U.S. and British investment funds in particular are crying out for new investment opportunities and have set their sights on Germany, where politicians were decrying them as “locusts” just a decade ago.

Investment managers expect a 2.4 percent increase in mergers and takeovers involving private equity funds in Germany, according to an exclusive study by management consultancy Roland Berger. That compares with an expected increase of just 1 percent in France and a 2.1 percent decline in Britain, the latter as a result of the upcoming exit from the E.U.


German companies operate in a big local market and tend to be very well positioned internationally too. That makes them particularly attractive for the takeover market. Klaus Hessberger,, Financial Sponsors Coverage, JP Morgan

“I am convinced we will see a record volume in the German M&A market this year,” said Rainer Langel, German chief of investment bank Macquarie. “Many big transactions are being prepared right now. The environment for private equity investments is very good because private equity firms have been able to collect major new funds and the financing markets remain attractive.”

Private equity is an industry of superlatives. Nowhere else outside the public financial markets and hedge fund sector has so much capital been amassed. Worldwide, they’ve collected $2.5 trillion (€2.3 trillion), of which $820 billion hasn’t been invested yet, according to information services firm Preqin.

Pension funds and foundations have handed the investment firms ever more money because they can no longer earn acceptable returns from traditional investments. The firms use the money to buy shareholdings or invest in infrastructure projects.

According to the Roland Berger study, 52 percent of the more than 2,400 private equity experts it questioned in Europe expect the number of transactions to increase this year. One in three private equity firms plans to invest this year, in contrast with previous years when the focus had been on divestments.

Private equity managers favor Germany primarily because of its robust economic growth and its relatively stable political environment. There’s especially strong demand for majority stakes in family-run businesses and for transactions up to €500 million, or $527 million, said the Roland Berger study.

“German companies operate in a big local market and tend to be very well positioned internationally too. That makes them particularly attractive for the takeover market,” said Klaus Hessberger, co-head of financial sponsors coverage for Europe at U.S. investment bank JP Morgan. “So Germany has always had a relatively big share of large-volume takeovers in Europe.”

The competitiveness of Germany’s small and medium-sized business sector is a further advantage. The deals struck in the first weeks of 2017 are an indication of how strong the appetite of private equity funds is.

Cinven and Advent have made separate bids for drugs group Stada and the first official offers amounts to €3.5 billion.

U.S. investor KKR is buying into consumer research group GfK with an investment of around €300 million. Concardis, the German card payments firm, was sold to Bain Capital and Advent in mid-January.

There’s no let-up in sight. Financial sources said private equity firms are targeting energy services firms Ista and Techem, the radiology division of Bayer and medical technology firm Ottobock. The investments in those firms alone will amount to several billion euros, said one banker.

Technology and healthcare firms are in particularly strong demand in Germany but there’s potential interest everywhere.

“Almost all sectors are interesting at the moment. There’s a preference for market leaders in their respective industries and companies that are big and have an attractive growth momentum,” said Mr. Hessberger.

The outlook for the market will depend in part on the impact of President Donald Trump who is said to be a strong supporter of the American private equity sector.

“In our view, protectionism in America won’t have a negative impact when it comes to private equity,” said Mr. Langel of Macquarie. “But conditions in the U.S. are questionable for strategic investments from China. The focus on Germany will increase further as a result.”

With the U.S. set to become a more difficult place to do business, Chinese investors will likely turn more to Europe and Germany to realize their long-term growth targets. They’ll be rubbing shoulders in Europe with cash-rich Anglo-Saxon financial investors, so there’s likely to be brisk bidding, resulting in steep prices.

“If there’s no harassing fire from European politicians or the German government, 2017 will likely be one of the hottest years in the market for mergers and takeovers,” said one German investment manager.

Anglo-Saxon players have a tight grip on the global private equity market. Of the 100 biggest investment funds, 62 are based in the U.S. and 16 in Britain. The three leading U.S. funds have collected immense sums in the last decade, with the Carlyle Group amassing $66 billion in equity capital, Blackstone $62 billion and KKR $58 billion, according to Preqin’s “2017 Global Alternatives Report.”

Their firepower is even greater than the figures suggest because the firms only tend to use 30 or 40 percent of their own capital in a takeover and cover the rest of the purchase price with bank loans or other outside financing.

The firms owe their lead to a favorable tax environment in their home countries, but Asian funds are starting to catch up. Germany provides juicy targets for the investors in the form of solid companies, but it doesn’t see much of their profits. In 2015 alone, private equity funds paid out $472 billion to their capital providers — a new record.


Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. To contact the author: [email protected]