Trends in Private Equity Funds in Germany
In contrast to some European countries and the U.S., Germany continues to be a difficult country for launching private equity or venture capital funds, despite the fact that the asset class has become increasingly attractive, especially for institutional investors, as an alternative to traditional investments in equities and government securities.
It is true that fund managers that have proven themselves on the market, such as Deutsche Beteiligungs AG or Auctus in the buy-out sector or Wellington, Creathor Venture or Earlybird in the VC sector, can continue to launch new funds with relative ease. New market participants (with the exception of some corporate venture investors, such as SevenVentures from ProSiebenSat.1 Group), however, the market is seeing increasingly rare. In specialty segments, such as turnaround or succession investments, the usual players (e.g. Orlando or Perusa) are active, but there are also a few new managers who want to apply their experience from international private equity houses in new structures.
The reluctance of German managers to launch fund structures is of course also due to the still unfavorable framework conditions for private equity in Germany. This is not so much due to the now completed implementation of the AIFM Directive in this country (since July 22, 2013, fund managers either need a permit or must register with BaFin for this purpose), although considerable uncertainty has also arisen in the industry here as a result of the drafts of the German KAGB put up for discussion by the German legislator in advance — keyword: private equity only for professional investors. — However, the future regulation of private equity funds will lead to increased costs in fund management, further compliance requirements and, above all, restrictions in finding investors. With regard to the latter, although the expansion of the possible group of investors to include so-called semi-professional investors (e.g. family offices) has helped, the requirements for documenting the investment expertise of these investors are very extensive.
More serious for German fund managers are the tax conditions for private equity funds. For example, in contrast to our European neighbors, there is still no law in Germany that guarantees the tax transparency of private equity funds. This, together with the continued VAT on management fees, does not necessarily contribute to the competitiveness of German fund providers vis-à-vis their international competitors.
According to current statistics, 2013 is expected to be a new record year in terms of private equity investments in Germany. Although the figures are still far behind those from the years before the financial crisis, they show a clear recovery of the private equity asset class. This is also due to the increasing importance of German investments for international private equity funds and other foreign investors.
The good management of the financial crisis in Germany, the excellent economic prospects of German companies and the political stability lead to an increase in the number of ‘German’ portfolios in international funds. Successful exits by funds that have already invested (e.g. Advent International’s exit from the chemical company Oxea or TPG’s exit from the fittings manufacturer Grohe) illustrate successful investment stories.
In addition to the economic prospects, the increased legal certainty of transactions and a relatively manageable legal system in Germany also play a role. The public accessibility of important company information, e.g. in the commercial register for due diligence purposes, as well as the extensive codification of German law in legal form helps in the agreement and interpretation of contracts. Moreover, the managers of international funds do not have to worry about the regulatory and tax environment for private equity funds in Germany, as the funds are almost exclusively managed from London or New York.
In addition to private equity funds, foreign strategic investors are increasingly investing in Germany. In particular, companies from the Far East are gaining access not only to new sales markets, but above all to technology and innovations. This trend also has a positive aspect for private equity funds investing in German companies, as it opens up new exit channels.
Although private equity in Germany does not yet have a comparably high degree of penetration as in the Anglo-Saxon countries, for example, the conditions in this country for investments by foreign funds have improved considerably. — While they were still branded as locusts a few years ago, social acceptance has increased considerably in recent times.
However, international investors will continue to be more likely to be found in large-volume deals than in the mid-market or small-cap sector. One reason for this is that many of these investors do not have a complete overview of the market due to the lack of a basis in Germany, or smaller investments are simply not possible for funds that collect billions from investors. Some medium-sized companies that are willing to sell may be open to German financial investors, but they may not yet be prepared to accept an English-speaking Wall Street investor.