3 questions to smart minds
Photo: T. Gierath | ReedSmith

Trends in Private Equity Funds in Germany

For this 3 questions to T. Gierath

Photo: T. Gierath | ReedSmith
29. Octo­ber 2013

You always hear Ameri­cans asking whether things have impro­ved here with private equity and venture capi­tal compa­nies? It is comple­tely incom­pre­hen­si­ble to most foreig­ners why the PE and VC indus­try has not gained much more momen­tum in Germany so far. Espe­ci­ally since there are so many excel­lent compa­nies in Germany.

For this 3 ques­ti­ons to Lawyer and Part­ner at Reed­S­mith, Munich

1. What is the situa­tion regar­ding the estab­lish­ment of private equity funds in Germany? What role does current legis­la­tion play in this?

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.

2. Is there a noti­ceable increase in foreign investor/private equity fund activity?

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.

3. Do private equity funds from the USA or other count­ries find it easy to invest in Germany?

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.

Subscribe newsletter

Here you can read about the latest transactions, IPOs, private equity deals and venture capital investments, who has raised a new fund, how Buy & Build activities are going.

Get in touch

Contact us!
fyb [at]