Private Equity – New independent eyes the Mittelstand prize

A new independent fund expects to amass e125 million ($121 million) for investment in the German-speaking markets within the next few months.

Munich-based CBR Management GmbH at the beginning of March announced a e80 million first close for EquiVest GmbH & Co Beteiligungs KG fr Vermgensanlagen, which will focus on acquiring controlling positions in mid-market companies.

Despite the much-vaunted potential of the German mid-market, relatively few private equity players have yet succeeded in wooing traditional owner-managers. Here, CBR believes it will have an edge on the competition, thanks to the background and experience of its principals. The firm’s key figures are Dr Eberhard Crain, Dr Wolfgang Behrens-Ramberg and Joachim Mller-Wende. Drs Crain and Behrens-Ramberg were founders of LBO Deutschland Vector, the German manager of LBO Europe and, after that fund reached full investment continued to work with LBO Europe colleague Jean-Daniel Camus to provide a deal sourcing and structuring service for parties including Donaldson, Lufkin & Jenrette. Both come from industrial backgrounds, having held senior positions in family enterprises in the chemicals and publishing sectors. Mller-Wende has been directly involved with the German private equity market since 1989, working with private equity groups European Acquisition Capital and Granville Private Equity Managers before forming his own corporate finance firm, Quest Capital.

CBR’s principals therefore have a longstanding network in the Mittelstand, a factor that the firm expects to prove extremely valuable. Says Mller-Wende: “Dealing with owner-managers is a slow process unless you can demonstrate you’ve been around in the market for some time and often you will find the same people running [target] companies that were there ten years ago”. In parallel, the CBR team’s contacts among banks and acquisition finance departments ensure that the firm often gets shown deals ahead of the market, according to Mller-Wende.

The team also boasts insight into the private owner-manager’s perspective: “These people are not entirely rational or buck-oriented’ they are not necessarily interested in the extra DM5 million that might be gained through an auction process, and they don’t like quick deals involving leveraged structures”. Owner-managers also tend to prefer to deal directly with decision-makers rather than executives who report back to a central investment committee. CBR therefore expects that its status as an independent, where investment decisions are taken solely by the principals, will constitute a further competitive advantage.

The Mittelstand is a broad definition: German federal statistics classify firms with sales of up to DM2 billion as mid-market but, within this value band, there

are huge variations in management models and corporate structures. EquiVest will focus on typical’ owner-managed firms or corporate subsidiaries with enterprise valuations in the DM100 million-DM200 million (e50 million- e100 million) range, a segment of the market where deal flow is much greater than in the DM500 million to DM1 billion range. There, auctions are the norm and transparency is greater. Although the fund will concentrate on investing in Germany, Austria and Switzerland, it will also encourage its investee companies to build pan-European presence via add-on acquisitions.

Mller-Wende contends that, although many more firms are theoretically targeting the Germanic mid-market, there are perhaps only ten serious contenders in the sector, including other independents like Quadriga and ECM.

Investors signing up for the EquiVest fund at the first closing include Kreditanstalt fr Wiederaufbau, Dresdner Bank, ProVenture, Advisers on Private Equity, Lombard Odier, Gerling, and German retail fund-of-funds MPC Global Equity. The CBR principals are also investing in the fund, which is being marketed by Campbell Lutyens. All fund participants will be offered co-investment opportunities according to a pro-rata formula.

Mller-Wende reports that CBR has encountered enough interest within Europe to take the fund to its e125 million target. However, he says it is not inconceivable that the vehicle might also be marketed very selectively in the US. “In fact,” Mller-Wende concludes, “EquiVest could in theory be very substantially oversubscribed but we have set an absolute maximum of e150 million”.

The new fund’s first deal, a DM200 million spin out from a German conglomerate, is scheduled to close within the next few weeks following seven months of due diligence and negotiation.