The German Private Equity Market. An Analysis of its Development


Term Paper, 2018

28 Pages, Grade: 1,3

Ayman A. (Author)


Excerpt

Table of Contents

List of Figures

List of Tables

List of Abbreviations

1. Introduction
1.1. Problem Description
1.2. Scope of Work

2. The Private Equity Background: Terms, Data and Structure
2.1. Definition and Product Categories of Private Equity
2.2. The Structure of Private Equity Business
2.3. The Origin and History of Private Equity Market in Germany

3. The Private Equity Market in Germany since
3.1. The Private Equity Market in Germany from 1990 to
3.2. From the Stock Market Hype to the Stock Market Crash
3.2.1. Private Equity Record Years in Germany since
3.2.2. The Consolidation Phase after the Rapid Growth since
3.2.3. The boom after the Consolidation Phase since
3.3. Current Situation of German PE Market Compared to the US
3.4. Major Players in the German Private Equity Industry

4. Opportunities and Challenges of the German Private Equity Market
4.1. Future Opportunities
4.2. Challenges and Current Influencing Factors

5. Outlook and Conclusion

Bibliography

List of Figures

Figure 1: Development of Total Investments 1986 – 2004 and Change over Previous Year 5

Figure 2: Investments in Germany 2008 - 2017 10

Figure 3: Investments in 2017 by Investment Stage 12

Figure 4: Regions Received the Most Investments in Germany 12

Figure 5: Private equity investments in Germany as of 2016, by sector (in 1,000 euros) 15

List of Tables

Table 1: Major Players in the German PE Market 14

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

1.1. Problem Description

In the last decades, the private equity (PE) market in Germany has witnessed waves of rise and fall. But it surpassed, by the end of 2017, all the records of German PE history. According to Deutsche Beteiligungs (DBAG), the amount of transactions in the mid-sized businesses in the German market dramatically increased and hit €4.4 billion in 2017 which was the highest during the last 15 years.1 But in contrast, the competition in the German market has been recently high with a steady number of companies which led to high prices and overvalued companies. PE firms target the mid-sized businesses since they are more likely to accept financial investors than bank loans or credit lines. However, this problem can now be countered with the help of PE in the context of alternative corporate financing. It should be noted that PE business has been a concern of German politics and businesses since the 1960s where the financial system was basically based on banks which is not appropriate for the development of PE industry. The government intervention was the base to build a stronger PE industry away from bank-based financial systems. Recently, the stock market segment was a key driver for the dynamic development of PE market. The price falls and the collapse of the overheated and overvalued companies were also clearly felt in the PE segment and generated a great deal over scepticism on the capital markets.

1.2. Scope of Work

In this work the development of this young PE market in Germany is analysed in order to form the base of comprehensive understanding of the market today. The structure of the work is as follows: The second chapter presents general information and definitions about PE. In the third chapter, which is also the main part, the development of the German PE market is chronologically described since the 90s until today. In the process, the decisive events and structures of the individual stages are examined. Further, major players of the market are explored in this chapter. The fourth part of this work deals with current and future opportunities and problems of PE in Germany.

2. The Private Equity Background: Terms, Data and Structure

2.1. Definition and Product Categories of Private Equity

According to the European Private Equity & Venture Capital Association (EVCA), private equity can be defined as “equity capital provided to enterprises not quoted on a stock market”.2 The term PE is often described in today's literature as "non-exchange-traded-equity" where PE companies invest in the equity capital of companies not listed in the stock market aiming to finance the growth of small and medium-sized enterprises (SMEs) with externally sourced equity.3

The term that still often appears as a synonym for PE is Venture Capital. But according to the official definitions of the two PE umbrella organizations - BVK and EVCA - PE is the generic term, while venture capital is a product category of PE. Venture capital is basically used in the early stages of corporate development as well as in other expansions and based on return expectations from the value growth of the company.4 This also includes active, entrepreneurial support for the financed company since the risks and deficits are particularly high in the early stages. Another category of PE is the ​​so-called Buyout financing into established companies. This category includes leveraged Buyout (LBO) to fund growth, support businesses in turnaround situations or as a spin-off financing of parts of the Group and Management Buyout (MBO) to fund the management team of the financed company to acquire part or all of the business.5 In addition, in the PE market, the so-called Mezzanine financing is a hybrid financial instrument between equity and debt.6 The mezzanine entitles the PE firm to convert to an ownership or equity interest in the financed company in case of default. Hence, these PE categories provide an alternative financing for all stages of a company's development.

2.2. The Structure of Private Equity Business

The PE business is typically organized as limited partners (“LPs”) and general partners (“GPs”). LPs constitute the outside investors providing the capital as institutional investors such as insurance companies, endowment funds, banks, foundations, pension funds as well as high-net-worth individuals.7 The majority of PE funds are organized as LPs where the liability extends only to the amount of contributed capital and normally for a lifetime of 10 years. GPs are the professional investors who make “capital calls” when needed and deploy the pool of fund´s capital.8 They manage the capital and all stages of investment cycle in terms of deal sourcing and origination, making investment decisions, transaction structuring, portfolio management and exit strategies. Today in the German PE market, there are two most common structures, the Limited Liability Company (GmbH) and the Limited Partnership (KG) with a sole general partner (GmbH) in the legal form (GmbH & Co. KG).9

The PE firm aims at increasing the value of the financed company through a supervisory, advisory and management support. The target group of PE companies are thus companies with an above-average potential for value appreciation, through innovative products or efficient restructuring. After the value having been increased, the PE firm will thus be able to resell the holdings held for a certain period of time at a profit. Hence, it can be said that the business of the PE firms consists of the purchase, management and sale of equity interests. In doing so, companies are financed and also supported by business management, which helps the company in its development and is reflected in the company value. Of course, this last described process is an optimal case, which does not always happen in reality.

2.3. The Origin and History of Private Equity Market in Germany

The idea of ​​equity capital, and above all of venture capital (VC), originated in the USA. Capital for innovative and risky endeavour was indeed awarded before the Second World War. The whole thing began in 1946 in an institutionalized form. The literature therefore unanimously agreed on the American Research and Development Corporation (ARD) as the first VC company.10 The beginnings of the German equity capital market back to the mid-1960s, when the first PE company, Deutsche Beteiligungsgesellschaft (DBAG), was founded as VC firm providing funds to companies not publicly listed.11 Until the mid-1970s subdued development of this new stage of the capital market was due to various German characteristics. For one thing, the German market lacked the large pension funds as institutional investors and was falling behind the US, UK and France in technological innovations. Secondly, there was no market in Germany for a long time, which made it easy to exit. The third striking peculiarity in the context of corporate financing in Germany is the intensive house-bank relationships of companies, which did not turn out to be particularly open and encouraging for this new form of financing.12 The 1970s were characterized by the medium-sized investment firms, which could refinance favourably by the ERP investment program launched by the Government. However, the intention to promote the mid-sized companies by this did not achieve promised success, since the restrictions associated with the program made it unattractive to PE firms.13 With the beginning of the 80s, a new wave of foundations set in, this had its focus on the venture capital area and wanted to copy the American model of success. But even here, the successes were not to the extent that they were observed in the American market. This was partly because the start-up and technology landscape in Germany were not as advanced as in the US. Another reason is the non-existent divestment opportunities which hindered the attractiveness of equity financing. Nevertheless, the PE market recorded a boom at the end of the 1980s, but it came to a standstill at the beginning of the 1990s. Towards the end of the 90s, a true success story developed as will be reviewed in the next chapter.

3. The Private Equity Market in Germany since 1990

3.1. The Private Equity Market in Germany from 1990 to 1996

After the boom of the 80s, the 1990s began with a slight consolidation phase. This development was characterized by stagnating new business of approx. €0.5 billion per year. The attempts of PE companies to come out of this low were mainly due to realignments of the investment strategies as new investment opportunities came up. Therefore, some focused more on specific financing phases, such as Early Stage or Buyouts to build up in-depth funding expertise. Others often acted as universal investment companies to avoid new business and diversification in the portfolio.14 The reasons for this low growth rate back to the emerging balance between new inflows and outflows of investments as well as general economic reasons represented by the long-lasting upturn in economic development subsided and passed into an ongoing period of stagnation or only slight growth in overall economic development.15 The first 1990s are therefore not to be seen as a break with the upturn observed in the previous decade. Rather, it is more or less a stopover to a much earlier stimulated development, with an intermittently unfavourable economic environment and other challenges for the German banking sector.16

Figure 1: Development of Total Investments 1986 – 2004 and Change over Previous Year17

Abbildung in dieser Leseprobe nicht enthalten

Source: Frohmann H., Dahmann A., 2005, p. 14.

Figure 1 shows the evolution of gross annual investments from 1986 to 2004, reflecting the slow pace of development in the early 1990s. Up to 1996, no noticeable growth in new investments can be seen. The value of the overall portfolio even remained relatively constant for the above mentioned reasons. It is noteworthy that there were often not the original planned exits, but a follow-up investment. This was due to lack of exit opportunities and the lag behind expectations. The unrealized expectations were largely caused by the consolidation phase, as a slowdown in the overheated markets began at that time. Developments in this phase have created greater risk awareness and restrictive investment behaviour among investors.18 The gross investments moved away from the financing of established mid-sized companies in expansion times, to seed and start-up financing of young and innovative companies.

[...]


1 Cf. Köhler P., Prices High, Investors Grumpy in German Private Equity, 2018, n. p.

2 Klier O. D., Managing Diversified Portfolios, 2009, p. 54.

3 Cf. Kokalj L.,Pfaffenholz G.,Moog P., 2003, p. 11.

4 Cf. Kokalj L.,Pfaffenholz G.,Moog P., 2003, p. 13.

5 Cf. Klier O. D., Managing Diversified Portfolios, 2009, p. 61.

6 Cf. Nijs L., Mezzanine Financing, 2014, p. 10.

7 Cf. Cornelius P., International Investments in Private Equity, 2011, p. 19.

8 Cf. Cornelius P., International Investments in Private Equity, 2011, p. 20.

9 Cf. Cornelius P., International Investments in Private Equity, 2011, p. 45.

10 Cf. Gaida M., Venture Capital in Deutschland und den USA, 2002, p. 31.

11 Cf. Frommann H., Dahmann A., Zur Rolle von PE und VC in der Wirtschaft, 2005, p. 12

12 Cf. Gaida M., Venture Capital in Deutschland und den USA, 2002, p. 191

13 Cf. Frommann H., Dahmann A., Zur Rolle von PE und VC in der Wirtschaft, 2005 p. 12.

14 Cf. Frommann H., Dahmann A., Zur Rolle von PE und VC in der Wirtschaft, 2005, p. 13.

15 Cf. Leopold G., Frommann H., Eigenkapital für den Mittelstand,1998, p. 78

16 Cf. Gaida M., Venture Capital in Deutschland und den USA, 2002, p. 256

17 Cf. Frommann H., Dahmann A., Zur Rolle von PE und VC in der Wirtschaft, 2005, p. 14.

18 Cf. Frommann H., Private Equity Investments, 2003, p. 77.

Excerpt out of 28 pages

Details

Title
The German Private Equity Market. An Analysis of its Development
College
University of applied sciences, Düsseldorf
Grade
1,3
Author
Year
2018
Pages
28
Catalog Number
V516602
ISBN (eBook)
9783346118042
ISBN (Book)
9783346118059
Language
English
Tags
Private, Equity, Product, Market, Germany, Stock, History, US, Players, Industry, Investments, SME, Target, PE, Profit, BIllion
Quote paper
Ayman A. (Author), 2018, The German Private Equity Market. An Analysis of its Development, Munich, GRIN Verlag, https://www.grin.com/document/516602

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