Germany is the new core market for private equity in Europe

23 February, 2017

PwC’s Private Equity Trend Report: Private equity firms take over a total of 214 companies in the DACH region in 2016. Deal value up 83% to €25 billion. More private equity funds to be invested in Germany as a result of the Brexit referendum. Despite the boom, far more conservative financing of deals than before the financial crisis. PwC expert Steve Roberts: “Increasing competition means prices will continue to rise in 2017."

Düsseldorf, February 25th 2017

The DACH region is becoming a new bastion for private equity in Europe. While the European market stagnated at a high overall level, the number of acquisitions by private equity firms in Germany, Austria and Switzerland increased by 28% to 214 in 2016. Investments in this sector totalled €25 billion, an astonishing 83% rise and the best performance since 2007, as the new Private Equity Trend Report by PwC shows. The largest deals were signed in the final quarter of the year. The Frankfurt-based real estate service provider Officefirst was sold to the US investor Blackstone for €3.3 billion while the US Carlyle Group took over the German chemicals company Atotech of the French oil conglomerate Total for €2.9 billion.

German private equity managers highly optimistic regarding market prospects

“The German market, which was already booming, has again seen a significant boost due to the Brexit referendum. Even private equity companies, which have traditionally been concentrated in the UK, are now looking around for investment targets in continental Europe. And here Germany is particularly attractive because of its strong SMEs and the ‘safe haven’ argument”, says Steve Roberts, Partner and Head of Private Equity at PwC.

The increasing focus on the German-speaking market is reflected in the optimism of investors here, the PwC study shows. Whilst just a third of the 250 international private equity managers surveyed expect growth to continue in 2017, the figure is 43% for German private equity firms. And four out of five German managers are currently satisfied with how their portfolio is performing. The international figure is just 42%.

The private equity sector has achieved a new level of maturity

It is striking that the current private equity boom has far less leverage (less debt) than in the record years leading up to the financial crisis. In 2016 just 8% of German private equity companies financed the majority of their deals with debt; internationally it was 22%. Conversely, half the German portfolio managers were content with a debt ratio of below 40% versus a sixth for the same figure internationally. “The whole sector has become more mature, particularly so for the German private equity firms,” diagnoses Steve Roberts. “The times when returns yielded mainly from financial engineering are over. Private equity funds are now developing their portfolio companies operationally, as can be seen from the increase in holding periods. Key reasons behind this include the high prices on the M&A market which increasingly require equity stories focused on operational improvements. This is the only way for private equity companies to create the value required to earn the returns they need. Today, private equity managers are using digitisation strategies to optimise their portfolio and counter the increase in holding periods as well as low macroeconomic growth rates.

Competitors from outside the industry are increasing the pressure

However, the enhanced reputation has led to new players entering the market. An increasing number of players that are actually outside the sector, such as pension funds or insurance companies, are discovering the private equity model for themselves, intensifying the already very intensive price competition. Two out of three financial investors stated in the PwC survey that competitive pressure has increased again in 2016. As a result of this some private equity companies are now struggling to find profitable investment targets for their investors’ money. According to estimates of the research company Preqin, European private equity funds are sitting on $167.8 billion of liquidity, the highest level since 2008.

The result: when acquisition multiples are high, exits are more lucrative

“Competitive pressure should increase even more in 2017 – in the German market as well,” predicts PwC expert Steve Roberts. “The Chinese are getting gradually serious, as we have seen over the last few years. And many Germany strategic companies have long since switched to buying rather than selling mode.” The positive for some: despite acquisitions becoming more difficult with higher multiples, it becomes proportionately easier for financial investors to find acquirers for their portfolio companies when they want to exit. The number of exits in the DACH region increased to 153 last year, an increase of about 19%. The financial investment company EQT achieved the highest exit sales price in the German-speaking region with the sale of the Hamburg-based Leucoplast manufacturer BSN Medical to the Swedish Tempo producer SCA for €2.7bn.

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