Barlage Knoth & Cie pioneers AG fund structure

A new German buyout fund has made a break from tradition by adopting a stock corporation structure instead of the usual limited partnership arrangement. Frank Hock, managing director of Munich-based Barlage Knoth & Cie (BKCie), said the reasons for using this structure include improved transparency and tax security for investors.

The fund expects to hold a first close by the end of this year at around EURO75 million towards a total target of EURO175 million. HypoVereinsbank is the fund’s cornerstone investor, having committed 20 per cent of the fund’s capital or up to EURO17.4 million.

The family office of Klaus Murmann, former president of the Federal Association of German Employers, has also invested.

Rather than becoming limited partners investors are shareholders in subsidiary AGs, three of which have already been established. These subsidiaries will be the acquisition vehicles that make direct investments, each AG is only used for investments associated with one core investment topic or focus. Ultimately there will be seven AGs, each capitalised at EURO25 million. The five founders devised the new structure with legal advice from Freshfields Bruckhaus Deringer.

Growing uncertainty about the tax treatment of private equity funds in Germany prompted the firm to look for an alternative to the limited partnership. Investors participate directly in two or more of BKCie’s AGs, enabling them to realise tax exempt capital gains without facing the tax problems associated with an asset managing limited partnership. The management company, Barlage Knoth & Cie GmbH, has separate service agreements with each AG.

BKCie’s investment focus is on small- to medium-sized companies that have established products and markets but have been held back by deficits in business management. Hock says BKCie will increase the value of under performers by actively influencing management, improving operational and production processes and increasing productivity. “We aim to generate value not by increased sales volume or market growth but from profit improvements,” said Hock.

The strategy does not count on growth forecasts, which push acquisition prices up but are unreliable. “The concept works even if there’s only zero to two

per cent growth in sales. We’re aiming for at least a 15 per cent return.”

He believes that because the firm’s value generation is not market-driven it will have an anti-cyclical appeal. Other elements he hopes will attract investors are the prospect of a portfolio of established businesses, which may lower the perceived risk. The unique structure also means that it may be easier to sells shares in the vehicle (although it will not be listed) then to trade out of other LP positions.

The firm will target low growth industries such as mechanical engineering, electrical engineering and automotive supply businesses in German-speaking countries. The companies will have sales of EURO50 million to EURO200 million, as the partners believe smaller companies are more flexible and it will be easier to implement necessary changes.

Barlage Knoth & Cie was founded by five individuals; Dr Hans Albrecht, who set up Carlyle’s German operations and then founded Nordwind Capital Partners, will sit on the supervisory board. Dr Tonio Barlage, former chief operating officer and president of the Sauer Group, provides relevant industrial experience and is managing partner.

Dr Bernhard Heiss is a partner at Freshfields Bruckhaus Deringer and will join the supervisory board. Managing director Frank Hock was previously director of structured finance and structured investments at Sal Oppenheim, where he structured a private equity fund and fund-of-funds for the group. The final founder is Rainer Knoth, a member of the board of Bayerische Hypo-und Vereinsbank who will join the supervisory board.