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In Germany, Private Equity Spending Nears 2007 Peak

Hamburg Harbor Container Terminal. Source Bloomberg
At the Hamburg port, Germany's economy is booming and private equity investment is reaching pre-crisis levels.
  • Why it matters

    Why it matters

    Record spending by venture capital and private equity firms in Germany are likely to continue to fuel the country’s string of strong economic growth.

  • Facts

    Facts

    • Private equity spending in Germany this year may reach pre-crisis levels of 2007.
    • Experts see spending unbroken for the rest of the year despite global conflicts.
    • Private equity firms in Germany have $1 billion in uninvested capital.
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    Audio

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Financial investors are in a cheery mood these days.

Billions have been poured into takeover deals, investment funds are overflowing with capital and earnings in the first half of this year are at their highest rate since 2011, as the business climate in Germany turns increasingly sunny.

“Eight-five percent of international private equity funds with portfolio companies in Germany are also planning to invest in Germany in the next five years,” said Alexander Dibelius, the managing director and head of Germany and Austria operations for Goldman Sachs. “More than half of these funds even want to increase the volume of investment.”

Handelsblatt has obtained an exclusive report by Berlin-based BVK, the association of private equity and venture capital companies operating in Germany, which illustrates just how well major private equity firms such as London-based Permira and San Francisco-based Hellman & Friedman LLC are doing.

According to BVK figures, financial investors in Germany in the six months through June pumped €2.8 billion ($3.68 billion) into the market, surpassing the same period last year by more than a third. It’s the second-strongest result since the group began tracking these statistics in 2008.

Peter Güllmann, co-managing director of BVK, said the results were driven by majority share buyouts and increases in business expansions.

Leading the way were two deals. The first was the sale of Scout24, an Internet retailer that sells real estate and auto classified advertising, for €1.4 billion ($1.8 billion) to Hellman & Friedman by Deutsche Telekom.

The second was the sale of the heat exchanger business by Düsseldorf-based GEA to the private equity fund Triton for €1.3 billion.

While not all the deals have been finalized, the ones announced in the first six months of this year are worth €8.5 billion. The communications sector accounts for the largest share of activity, attracting 43 percent of all investments.

After a halting start to this year, investment managers seeing positive signs for more growth. This is true not only for overall business conditions in Germany, but also for the expectation of strong investment returns.

A so-called German private equity barometer, which is calculated by BVK and a Frankfurt-based state-owned development bank, KfW, rose by 9.4 percent on a scale of 56.0, approaching highs not seen since before the financial meltdown.

The largest contributors to this euphoria were big deals involving well-established companies. As the market tightens, according to BVK and KfW, there will be fewer opportunities, which will stabilize the business climate at a level that sets the stage for additional growth.

“The strong investment activities make us optimistic for the second half year,” said BVK managing director Ulrike Hinrichs, who also pointed to stable economic conditions in Germany and continued high demand for venture capital financing.

Yet there are concerns that volatility around the globe including the crisis in Ukraine could rattle the stock market.

“The currently tense geopolitical situation, and the accompanying pressure on stock prices, are not conducive to M&A activities, particularly those of German companies,” said Michael Drill, chief executive officer of German operations for Chicago-based investment bank Lincoln International.

However, Mr. Drill said that if the situation in Ukraine doesn’t worsen, there will still likely be major transactions involving German companies over the coming months.

Experts see the high valuations in the market as increasingly problematic. The Swiss-based Partners Group found assessments are slightly above the highest levels reached from 2006 to 2008.

“Overly liquid credit markets, and the pressure to invest that individual investors feel, results in buyers being more willing to accept higher prices,” BVK’s Mr. Güllmann said.

Alexander Kron, managing director and head of transaction advisory services at Ernst & Young in Germany, warns that financial investors often give far greater priority to the strategic aspects of an acquisition and less to the sales price. They must keep a closer eye on the valuations, especially given their relatively short holding period since, as a rule, financial investors hold them for only about seven years.

Goldman Sachs Germany and Austria Chief Alexander Dibelius. Source DPA
The Goldman Sachs Germany chief, Alexander Dibelius, said private equity interest in Germany is unbroken. Source: DPA

In any case, investment managers have access to plenty of money. Emanuel Strehle, a partner at the firm of Hengeler Mueller, said German funds have more than one billion dollars of uninvested capital at their disposal. He believes this signals a new round of large volume deals in the next couple of months, assuming financial conditions remain at these favorable levels.

Martin Kühner, managing director of Altium Capital in Frankfurt, agrees. “This will continue to determine the market for the next six to 12 months,” he said.

 

This article was translated by David Andersen. Jeff Borden also contributed to this story. The authors can be reached at: köhler@handelsblatt. com and landgraf@handelsblatt.com

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