DBAG: Value enhancement potential also in secondary buy-outs
Frankfurt am Main — The current industry survey conducted by Deutsche Beteiligungs AG (DBAG) on the subject of secondary buyouts produced the following result: a) Secondary buyouts are attractive despite lower expected returns, b) there is a strong focus on buy-and-build strategies and internationalization.
The development of new customer groups and business areas as well as the internationalization of the business are the most promising value levers for private equity companies when they acquire a medium-sized company as a second financial investor. However, even in times of strongly developed knowledge of various value enhancement strategies, the return potential of so-called secondary and tertiary buy-outs is lower than when a financial investor invests in a company for the first time. This is shown by the 6th Midmarket Private Equity Monitor, for which FINANCE magazine surveys investment managers of around 50 private equity houses operating in Germany every six months on behalf of Deutsche Beteiligungs AG (DBAG) on trends in the German midmarket segment.
Nearly four out of five experts (79 percent) said in the latest survey that secondary and tertiary buyouts in the midmarket promise lower returns than primaries — companies that have not previously been owned by another private equity firm. Nevertheless, such transactions are experiencing an upswing: last year, in more than half of the buyouts in the German SME sector (19 out of 35 transactions), financial investors were active on both sides, i.e. as sellers and as buyers; this is a new record.
In view of the fact that more and more capital from institutional investors is looking for investment opportunities, thus increasing competition for investment opportunities, the high proportion of secondaries is hardly surprising. “Such transactions have long been established and are also accepted by the investors in our funds,” says Torsten Grede (photo), Spokesman of the Board of Management of Deutsche Beteiligungs AG; “they are a sign of the increasing maturity of the German private equity market and definitely offer advantages,” Grede continues. “Transactions between financial investors are often easier to structure because both partners know the market practices. Management has already proven its entrepreneurial expertise and has gained experience with corporate governance, which a private equity partner brings to the table.”
85 percent of those now surveyed said that prior to a Secondary, operational control had already been improved in the company through KPI-based reporting. 64 percent observe that working capital has been reduced. Costs in procurement are also already being reduced in the Primary, according to the majority.
Nevertheless, there remain sufficient starting points for the second or even the third financial investor to develop the companies further. Strategies that used to be common, such as financial engineering or splitting up companies, have long since ceased to play a decisive role anyway. “An increasing number of private equity firms have a stronger focus on more complex value creation strategies,” said DBAG board spokesman Grede.
Three quarters see the greatest potential for value enhancement in SME follow-up investments in expansion into new customer groups and business areas. 67 percent also cite the internationalization of the business as a value lever that is particularly well suited to secondaries. In addition, 48 percent said they often still needed to integrate add-on acquisitions made under the aegis of the first private equity partner.
A look at the recurring questions shows that the vast majority of houses in middle-market private equity also generally rely on buy-and-build strategies. At 79 percent, this continues to be by far the most highly rated value enhancement method — regardless of whether it is an initial or follow-on investment. Private equity investors benefit from the fact that there are still many highly fragmented markets, especially in the midmarket, in which strong market leaders with high profitability can be established through acquisitions in a relatively short time. When acquisitions of smaller companies are made at lower valuations, the price of the entire transaction can be reduced in this way: “This is also a response to the price development we have seen in recent years,” comments CEO Grede, “and is representative of the private equity industry’s ability to adapt to changing market conditions.”
The longitudinal data of the survey also show that, irrespective of the transaction type, internationalization (currently by 52 percent of respondents) and the strategic expansion of additional businesses and services (46 percent) continue to be considered attractive, even among companies that have already been in the hands of an investment company.
Nevertheless, primaries continue to offer the most starting points for initiating strategic further development and realizing value enhancement potential. “Those who can close as many such transactions as possible will have an advantage over their competitors,” says board spokesman Grede. DBAG has structured five buyouts in the past twelve months. Four of them were Prima-ries, in which the respective company founders were the salespeople. The fifth new investment concerned a company that had previously been in the hands of other financial investors.
About Deutsche Beteiligungs AG
Deutsche Beteiligungs AG, a listed company, initiates closed-end private equity funds and invests alongside DBAG funds in well-positioned medium-sized companies with development potential. DBAG focuses on industrial sectors in which German SMEs are particularly strong by international standards. With this experience, know-how and equity, it strengthens the portfolio companies in implementing a long-term, value-enhancing corporate strategy. The entrepreneurial investment approach makes DBAG a sought-after investment partner in the German-speaking region. The capital managed and advised by the DBAG Group amounts to approximately 1.8 billion euros.