Recent trends in the German private equity market

October 2024  |  SPECIAL REPORT: PRIVATE EQUITY

Financier Worldwide Magazine

October 2024 Issue

2023 was a slow year for private equity (PE) deals, due, in no small part, to an unfavourable interest rate environment, valuation gaps and continuing geopolitical tensions. The first half of 2024 has begun to show some slight improvements in transaction activity in the German M&A market involving PE investors. While there are still challenges in the deal and regulatory environment, it seems that PE investors are adapting to the new reality and finding ways to get transactions done, including some big ticket deals.

Deal quantity is still in recovery mode, but the German M&A market saw some larger deals in the first six months of the year, and more are expected for the rest of the year, which seems to be consistent with the general Europe, Middle East and Africa (EMEA) deal trend toward fewer but larger deals. For example, KKR is taking over energy infrastructure company Encavis. The €4.2bn transaction is the largest deal in the energy sector in Germany so far this year. KPS Capital Partners struck a €3.5bn deal to acquire Siemens’s Innomotics business. Meanwhile, Bain and Cinven are preparing to exit their Stada investment. Various financial investors are interested in the drug manufacturer, which is valued at up to €11bn and, in addition to the potential sale of DB Schenker for approximately €14bn, could be one of the next big ticket PE transactions in the German market in 2024.

To get deals done and secure financing outside ‘classic’ bank debt, some usual and some not so usual alliances can be seen. In the bid for DB Schenker, CVC is leading a consortium that comprises sovereign wealth funds Abu Dhabi Investment Authority and GIC from Singapore. While the use of sovereign funds for syndication is not uncommon, KKR has taken a more original step. In its take-private of Encavis, KKR is teaming up with the Viessmann family. In 2023, the Viessmann family sold the family business’s climate solutions activities to Carrier and is sitting on significant deployable funds, becoming a relevant partner for PE-backed buyouts. Generally, family offices are increasingly seen in deals with PE players. For example, in 2023, instead of a secondary transaction with another PE investor, EQT sold Schülke & Mayr to the Strüngmann and Bitburger family offices. The Näder family, majority shareholder of prosthetics manufacturer Ottobock, bought back EQT’s 20 percent minority stake utilising a €1.1bn facility issued by debt funds of Carlyle, KKR, Hayfin and Macquarie. The use of debt funds in buyouts is another trend that has found its way into the German PE market, as can also be seen in the €3.9bn majority investment by a PE-led consortium targeting software company Aareon, which is partly financed by private credit from other financial investors.

From a sector focus perspective, it is worth looking at two rather ‘sensitive’ sectors in which the German M&A market provides investment opportunities driven by recent policy developments: defence and energy infrastructure.

The geopolitical situation of recent years has increased the significance of the German defence industry. To satisfy the need for technological evolution and the urgency to achieve defence readiness, significant investment by market participants is required to maintain or even grow their capacity and offering. This requires funding and therefore creates M&A opportunity. At the same time, defence investments can be attractive for PE investors because the industry’s multiyear supply contracts generate predictable cash flows even during economic downturn. Historically, and due to environmental, social and governance boundaries, defence investments by PE investors have been regarded rather critically. However, the change in governments’ security policies and the increase of government spending in the sector have opened new perspectives for PE investors that are open to making investments in this industry in Germany. For example, in 2016 KKR acquired the majority of battlefield electronics and avionics manufacturer Hensoldt, and Triton acquired battle tank transmission manufacturer Renk in 2020. Continuing this trend, Carlyle is now close to securing a majority stake in naval vessel manufacturer ThyssenKrupp Marine. In many such situations the German government acquires a minority stake for national security reasons and to provide certain financial assistance due to the longevity of defence projects, such as guarantees for customers, which PE investors usually do not want to provide to avoid freezing up liquidity.

Another sector in which opportunities for PE investors arise is energy infrastructure. The policy driven transition toward decarbonisation and green energy requires significant investment. However, due to budgetary restraints, the German government will not be able to provide such funds alone. Therefore, private capital is among the solutions to fill the financing gap and to acquire and develop companies in the energy sector. With its acquisition of Encavis, KKR has already shown that there is merit for such investment rationale. Further, earlier this year the German government abandoned the envisaged acquisition of the German electricity grid business of TenneT. The estimated deal value was €25bn, but the German government eventually backed out due to concerns about financing the purchase price. Infrastructure funds could now seize the opportunity and step in and, in the end, much like PE investments in the defence sector, the German government could end up acquiring a minority stake.

On the exit side, at the beginning of the year it seemed as if initial public offerings (IPOs) were coming back. Battle tank transmission manufacturer Renk finally made it to the stock exchange. For perfumery and cosmetics chain Douglas, an IPO prevailed over the M&A track. However, in Q2 the IPO climate cooled, and M&A deals were preferred to exits via the stock exchange. It seems that investors can achieve higher valuations in private deals. Sunrise Medical abandoned its IPO plans, which would have valued the company at approximately €2bn. Instead, PE owner Nordic Capital passed the company on to Platinum Equity. At Flix, the operator of FlixBus and FlixTrain, the existing investors preferred PE investor EQT instead of exiting via the stock exchange. EQT offered a higher valuation than the banks were prepared to give in an IPO scenario.

Despite volatile markets, the anticipation of lower interest rates, alternative financing sources in the form of private credit or family offices, plus the German government acting as ‘co-investor’ in certain sectors, could create a more deal-friendly environment. In addition, the German Mittelstand constantly provides investment opportunities. Medium sized, family-owned businesses are on the lookout for professional investors to assist with financing, operational optimisation or even succession, and therefore often turn to PE investors. For example, fashion group Bogner is looking for an investor for the first time in the company’s long history; a step that the founder and owner of animal food chain Fressnapf has now completed. PE investor Cinven will acquire a minority stake in Fressnapf to facilitate the company’s growth plans in Europe.

At the same time, PE investors must keep an eye on the regulatory environment. For investments in sensitive sectors, sponsors must carefully choose their co-investors. While sovereign wealth funds are often a welcome co-investor, they do attract regulatory scrutiny. Likewise, Chinese co-investors can jeopardise deal security and put co-funding security at risk. While there are structural measures that can be taken to mitigate the regulatory risk of a transaction, the authorities are generally tightening their grip. During the first months of the foreign subsides regulation, the EU Commission has shown its willingness to rigorously use this tool. As regards foreign direct investment control, the German government is currently in the process of preparing another overhaul of the German foreign direct screening regime that will likely widen the scope for review of foreign investments and close certain loopholes to structure around foreign direct investment review.

 

Mirko von Bieberstein is a partner at Cleary Gottlieb Steen & Hamilton LLP. He can be contacted on +49 69 97103 204 or by email: mvonbieberstein@cgsh.com.

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BY

Mirko von Bieberstein

Cleary Gottlieb Steen & Hamilton LLP

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