3 questions to smart minds

How are current/planned transactions performing in the current political environment?

For this 3 questions to Dr. Nikolaus von Jacobs

McDer­mott Will & Emery in Munich
13. July 2022

Germany is curr­ently expe­ri­en­cing an incre­asing poli­ti­ciza­tion and conse­quent repo­si­tio­ning of its economy. Large (Dax) compa­nies in parti­cu­lar are being held more accoun­ta­ble by the public; recent deba­tes on sustaina­bi­lity, social respon­si­bi­lity and climate protec­tion clearly show this. — Geopo­li­ti­cal deve­lo­p­ments, howe­ver, affect entre­pre­neurs of all sizes. Those plan­ning (partial) sales are beco­ming more hesi­tant, for a variety of reasons. The poli­ti­cal envi­ron­ment leads to discrepant buyer and seller expectations.

For this 3 ques­ti­ons to Dr. Niko­laus von Jacobs, Part­ner at McDer­mott Will & Emery in Munich

1. What do you observe in tran­sac­tions that you are curr­ently managing?

A distinc­tion must be made here accor­ding to sectors. Depen­ding on whether a sector or a company has “exter­na­li­ties”, i.e. supply or sales rela­ti­onships with foreign count­ries, perhaps we should specify “non-EURO foreign count­ries”, we observe that sales proces­ses stall or are imme­dia­tely post­po­ned. In concrete terms, this means that the health­care sector, and health­care services in parti­cu­lar, is booming unab­a­ted. Local services are not affec­ted by events in Ukraine or Asia, by energy prices or even infla­tion, although staff shorta­ges may play a role. It may even be that inte­rest in this segment has increased even further, although this is hard to imagine. The situa­tion is simi­lar, depen­ding on the busi­ness model, with tech­no­logy compa­nies and, in some cases, impact invest­ments. We observe that inves­tors conti­nue to be very active in these segments and are getting their money’s worth.

2. How do you curr­ently assess the deve­lo­p­ment of tran­sac­tions and the German economy in the coming 12 months? What is the state of mind of medium-sized entrepreneurs?

In areas other than those mentio­ned, it is much more diffi­cult. Compa­nies that need inter­me­diate products, raw mate­ri­als or even energy from abroad are not only affec­ted opera­tio­nally by the current conflicts, infla­tion and the uncer­tainty of the near future. These circum­s­tances natu­rally also affect valua­tions on the market. In addi­tion, there is the read­jus­t­ment of the geopo­li­ti­cal land­scape. For exam­ple, how should an inves­tor instantly value a company with strong sales to China? Recent poli­ti­cal state­ments make the conti­nua­tion of histo­ri­cal figu­res and the resi­li­ence of busi­ness plans appear ques­tionable. For these reasons, we see ongo­ing proces­ses falte­ring in many segments. Announ­ced lawsuits are a long time coming. Many medium-sized compa­nies and also private equity funds that have been conside­ring a sale will now initi­ally focus on opera­tio­nal adjus­t­ments, at least for the 12-month period they have mentio­ned. This could be the estab­lish­ment of alter­na­tive produc­tion sites in Asia, e.g. in Viet­nam, Cambo­dia or Thai­land. I also hear a lot about plans by compa­nies to produce in Central and Eastern Europe, also from a sustaina­bi­lity point of view.

Medium-sized compa­nies in parti­cu­lar will say: I will also manage this crisis well on my own and over­come it by preser­ving or crea­ting value. À propos Central and Eastern Europe: I think that — if the situa­tion in Ukraine calms down — we will see a revi­val of the region. Now that ever­yone knows where the Black Sea is and where Ukraine is, aware­ness of the region has increased. The talent pool is tremen­dous, and I hear from regio­nal insti­tu­tio­nal inves­tors who are buil­ding the bridge between local human capi­tal and Western Euro­pean companies.

3. What is your fore­cast for the price deve­lo­p­ment of company sales? Are prices rising/falling? In your obser­va­tion, what problems do private equity funds have to reckon with?

In view of these deve­lo­p­ments, I also see diffe­rent price trends for the various sectors. In the afore­men­tio­ned health­care services and tech­no­logy segments, I do not expect major price chan­ges, although in view of rising inte­rest rates it remains to be seen whether inves­tors are prepared to adjust their return expectations.

In sectors more affec­ted by the “exter­nal” circum­s­tances descri­bed above, one would expect prices to fall. Howe­ver, I rather expect that these compa­nies will not even go to market, as owners will wait until the fog clears. This may mean longer holding peri­ods for private equity funds active in these segments. And at the same time, unless they shift their invest­ment focus, they will make fewer invest­ments. At the same time, they may see chal­lenges in fund­rai­sing: falling equity markets also mean lower allo­ca­ti­ons, in abso­lute terms, for insti­tu­tio­nal inves­tors (limi­ted part­ners) in private equity funds. Perhaps this will lead to smal­ler-volume funds (with an iden­ti­cal invest­ment focus). It remains exci­ting in any case.

About Niko­laus von Jacobs

Dr. Niko­laus von Jacobs advi­ses private equity funds and German indus­try play­ers on private equity, venture capi­tal and public and private M&A tran­sac­tions. He is a member of the Corpo­rate Prac­tice Group and head of the German private equity acti­vi­ties at McDer­mott Will & Emery in Munich.

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