Germany’s private equity market is showing little sign of finally delivering the riches it has been said to promise for so long. Speaking at an SJ Berwin-hosted seminar on the German market Andrew Richards, Frankfurt-based director of 3i Europe, said there had been a 40 per cent decline in MBO deals in the last five years. However, transaction values have shown a three-fold increase since 1997.
Richards said there had been a significant decline in the number of deals sourced from family vendors, citing the uncertain tax regime as one of the deterrents they currently face. He spoke of the need for a change in the German psyche to increase the number of Mittelstand deals. However, he feels that the current taxation environment and economic climate favours corporate sellers. “With a hardening of the economic environment, the number and size of corporate spin-offs will increase, and the position for family and private vendors should also improve when the inevitable upswing comes in the next three to four years.”
A dearth of deals has led to intense competition in the German market. The country does not produce enough investments to support domestic private equity firms reliant solely on German deals and is instead dominated by pan-European players. According to Richards there are around 15 players competing on 45 deals over €250 million each year with as few as nine transactions reaching completion. He also believes there is insufficient volume in the sub-€250 million market and predicts a rationalisation of the teams at both ends of the market, with follow-on fund raising being the crunch time.
Richards predicted secondary buyouts, a well-established and increasingly important feature of the UK and French markets which is not yet visible in Germany, would be a future source of deals. He believes public-to-private buyouts, which are currently attracting attention in other markets, remain a long shot in Germany due to complex legal regulations.
Also speaking at the seminar were Rüdiger Knopf and Uwe Steininger, who, respectively, head SJ Berwin’s offices in Frankfurt and Munich. Knopf looked at the impact the proposed tax changes, which the government is currently considering, might have on buyout deals. Steininger spoke about how changes to the taxation of carried interest would affect fund structures, highlighting the trend towards offshore structures and the appeal of firms relocating to the UK, Austria or Switzerland. “It [the tax position for funds] poses a danger of both funds and managers exiting Germany in droves, of which there is some evidence already, which will further injure the German economy,” he said.