Private Equity

Finding returns in the Mittelstand

Canyon Bicycles! Source: Canyon Bicycles

Last year San Francisco-based TSG Consumer Partners bought a minority stake in direct-to-consumer Canyon Bicycles for an undisclosed price. In October, London’s BC Partners agreed to buy ceramics specialist CeramTec in a deal that reportedly valued the target at €2.6 billion ($3 billion). And in September, Paris financial investor Chequers Capital took over nursing-home operator MK-Kliniken in a €500 million deal. Private equity’s long-prophesied entry into the German Mittelstand may finally be coming true.

Once shunned as “locusts” that swoop in and suck out cash before loading a company up with debt and flying to the next victim, Germany’s traditional small- and mid-size companies now seem to see financial investors as deep-pocketed partners. “Their image has changed,” says Mark Mietzner, a professor at the Zeppelin University in Friedrichshafen. “Financial investors can be an opportunity to advance a company not only financially but also strategically.”

The famous Mittelstand makes up the lion’s share of the German economy and for decades financial investors have been hoping to get a foothold in the sector. Experts have expected succession battles to lead to a boon but the gold rush never materialized.

The bad reputation of financial investors didn’t help either, but analysts and insiders say not all financial investors want to fill their pockets by trading a company’s cash for debt. “We’re not solely driven by a focus on returns. We also want to interact with the companies that we invest in,” says Peter Sachse, head of Frankfurt’s VR Equitypartner. “We see ourselves as a sparring partner.”

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The interest in Germany comes at a time when private equity is booming. Although the number of companies completing a fundraising slipped 22 percent in the third quarter, those that did collect the $95 billion in fresh capital brought in a total of 43 percent more over Q3 last year, according to Preqin analysts. Germany’s BVK private equity association expects a record number of deals this year. “The accounts of private equity houses and partner banks are full up,” says Colmar Dick, head of acquisition finance at state lender NordLB. “Topics that now have Mittelstand companies considering financial investors are succession planning in family businesses and major investments for expansion.”

Still, financial investors aren’t manna from heaven. Companies thinking to sell should play an active role in the process and know why they’re letting go of part – or even all – of their company and have a clear expectation of what comes next. Many companies just like to see what their company might really be worth and then are lured by the number of zeros, with no idea how to use the cash. Flip-flopping can become expensive.

Many financial investors are aware of the problem. “We concentrate on industries we’re very familiar with – services and healthcare, for example, and we use a so-called buy-and-build platform, which means we use several small- and mid-sized companies to create large, often international, companies with more than €100 million in sales,” says Ingo Krocke, a founding partner of Munich’s Auctus Capital Partners. Happy shopping.

Thomas Luther is a freelance journalist. Andrew Bulkeley adapted the article for Handelsblatt Global. To reach the authors:,

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