Equity Epiphanies

Show SME the Money

  • Why it matters

    Why it matters

    US equity firms have been struggling to find investment opportunities in the German Mittelstand for decades.

  • Facts


    • Depending on the definition, up to 95 percent of German firms count as belonging to the Mittelstand.
    • Many of these firms have been family-owned for decades or even generations.
    • Equity firms that want to buy and quickly resell majority stakes are not well received by Mittelstand entrepreneurs.
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Small and midsize companies are in the financial spotlight, such as Axel Meise's lighting design firm. Source: Occhio

Axel Meise started his lighting system brand Occhio in the late 1990s, quickly developing a reputation for innovative designs. Last fiscal year the company brought in nearly €30 million ($33.6 million) in sales, and Mr. Meise realized it wasn’t growing fast enough.

But he was skeptical of partnering with a private equity firm for fear that he’d have to give up control of the company. Then EMH came knocking on his door. The founders, Brothers Maximilian and Sebastian Kuss, didn’t want majority control; they wanted to grow with him. Mr. Meise sold 44 percent to EMH and now has the financial space to think big.

For 20 years, private equity firms have targeted the league of small and midsize companies known as Mittelstand that make up the backbone of Germany’s economy. But even when they offer big checks, institutional investors are having a hard time finding owners willing to sell to them.

Many established German entrepreneurs still need money to grow and modernize their businesses. But they prefer to partner with local banks or rely on business networks for their finance needs.

12 p22 Less for Medium-sized Companies-01

Most Mittelstand firms have been owned and managed by the same family for decades or even generations and are market leaders in their niche. Many fear betraying their life’s work by taking on an investor. Private equity firms, sometimes called “locusts” in Germany, have the unflattering reputation of squeezing companies and employees for every last dime of profit, and then reselling their investments.

As US private equity firm Blackstone sells off heavily indebted German outdoor brand Jack Wolfskin to a consortium of hedge funds, it only serves to reaffirm German entrepreneurs’ fears.

Jürgen von Wendorff, head of German investment firm Hannover Finanz, said the blame should be on investors, not entrepreneurs. “It’s not the German Mittelstand that needs to adapt to the equity industry, it’s the equity industry that needs to ask what the German Mittelstand wants,” he said.

According to Mr. von Wendorff, German SMEs want longer investment periods, investors willing to accept a minority stake, and being treated as partners at eye level.

Martin Krengel, head of Wepa Industrieholding, a producer of household paper products, said it’s important that investors understand and respect a family firm’s strategy and culture.

Investment firms have had a hard time with these demands in the past, but that might be changing, Mr. von Wendorff said. With interest rates low, funds have ever more money and need investment opportunities more urgently than before.

Mr. Krengel recently co-founded an association the western state of North Rhine-Westphalia devoted to providing capital for its members. Since many Mittelstand firms haven’t managed to come together with institutional investors, members of the association will shore up the capital needed when a member firm wants to grow or has to organize its succession.

Family offices of rich business families are increasingly providing capital for SMEs as well. Mittelstand entrepreneurs tend to trust them more, since they have risen to riches through their family companies and speak the Mittelstand’s language.

Equity company Hannover Finanz is one of the few homegrown institutional investors in the German Mittelstand. It currently holds stakes in 37 SMEs; most often a minority stake. For 22 years Hannover Finanz was invested in Rossmann, Germany’s second-largest drugstore chain, and it also helped finance smaller enterprises such as Henkelhausen, which provides engines for mining excavators and fire-fighting boats.

Like Hannover Finanz, EMH often only holds a minority stake in firms it invests in. For co-founder Maximilian Kuss it’s a positive sign when an owner wants to retain a majority: “It shows that he believes in the long-term success of his company,” he said.


Anja Müller writes about the mid-sized companies that form the backbone of the German economy. To contact the author: mueller@handelsblatt.com

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