Four out of ten MBOs regulate succession in family businesses
Frankfurt am Main — Last year, company founders and families among the sellers of companies to financial investors reached a new record high of around 40 percent, the highest share ever recorded. 19 of 47 management buyouts (MBOs) in the mid-market segment of the German buyout market were succession solutions in 2018. This is a further increase on the previous two years, which already saw above-average levels of family buyouts. In previous years, barely more than one in ten transactions had a family background.
“Founders and family entrepreneurs are increasingly recognizing the contribution that financial investors can make to the further development of their companies,” said Torsten Grede, Spokesman of the Management Board of DBAG. He continues, “We are now seeing more and more entrepreneurs seeking new shareholders with new business models in promising industries — so the market is broadening for us.”
There was also a significant increase in buyout activity overall. With 47 transactions, financial investors structured 12 more MBOs in the German SME sector last year than in 2017. This is also a new record for this market segment since Deutsche Beteiligungs AG (DBAG) began evaluating it in 2002. In almost every second transaction (21 out of 47), financial investors were active on both sides, i.e. as sellers and buyers. Spin-offs from groups or conglomerates were again the exception in 2018, with seven cases.
The analysis only takes into account transactions in which financial investors have acquired a majority stake in a company with management participation and which have a transaction value for the debt-free company of between 50 and 250 million euros. This is based on publicly available sources as well as estimates and research by DBAG in cooperation with FINANCE.
Last year, private equity companies financed buyouts in the German SME sector worth a good 4.8 billion euros. This is the highest value since 2002, when the evaluation began; in 2017, the market volume had amounted to 4.4 billion euros. The average enterprise value decreased from 126 million euros to 103 million euros. Unlike in 2017, the vast majority of transactions (30 out of 47) were now in the lower part of the segment (enterprise value: €50 million to €100 million). This corresponds to the high proportion of company founders among the sellers: Of the 19 MBOs in which financial investors replaced families as shareholders, 13 were disposals by the company founder. As in the previous year, around half of the transactions (24 out of 47) were structured by multinational, pan-European private equity funds.
Deutsche Beteiligungs AG is represented in the list of buyouts with three MBOs in 2018. It is thus once again one of the most active financial investors for private equity in the market segment under consideration. In the past 15 years, DBAG accounted for 27 transactions, more than any other financial investor.
Family offices are increasingly perceived as real competition
Despite the larger market volume, competition in the German SME buyout market is intense. This is because the supply of capital is also growing. In addition to the well-known private equity companies focusing on investments in German SMEs, there are other companies that are launching funds for investments in this segment on the market for the first time. Added to this is the capital of multinational private equity funds, which are also targeting the German market. Available capital will continue to exceed investment opportunities in 2019.
In addition to the abundant supply of capital, private equity firms face growing competition from family offices. Just how strong is shown by the current survey of investment managers from more than 50 private equity houses operating in Germany, who are polled every six months on behalf of DBAG by the trade magazine FINANCE about trends in the German midmarket segment. 72 percent of them — leaving strategic buyers aside for the moment — recently saw family offices as the biggest competition outside the private equity camp. A year ago, only 59 percent did so. More than 80 percent of respondents agreed with the thesis that family offices have made life difficult for private equity investors in the battle for medium-sized takeover targets in the past 12 to 24 months. These figures suggest that at least those family offices that have established private equity-standard structures have caught up with the established PE houses. Thus, family offices are not only perceived as competitors in bilateral discussions with sellers of medium-sized companies, but almost as much in auctions.
According to the survey, competition among the portfolio companies is rated at 8.4 on a scale of 1 (very low) to 10 (very high) — this assessment has hardly changed in the past three years.
DBAG triggers equity investments of over 270 million euros in 2018
In 2018, Deutsche Beteiligungs AG structured eight management buyouts for the funds it advises: Three of these, namely the MBOs of the mechanical and plant engineering companies Karl Eugen Fischer GmbH and Kraft & Bauer GmbH as well as the automotive supplier Sero Schröder Elektronik Rohrbach GmbH, were included in the statistics mentioned at the beginning. the five other MBOs are attributable to other market segments. DBAG triggered equity investments of around 270 million euros for this purpose. It has two funds at its disposal for investments in the midmarket: DBAG Fund VII — the largest German private equity fund for investments in the midmarket, with commitments of one billion euros — can deploy up to 200 million euros of equity per transaction; more than 50 percent of the fund’s resources are committed a good two years after the start of the investment. The DBAG ECF invests majority or minority interests in companies with a smaller enterprise value; it focuses primarily on owner-managed medium-sized companies and offers a high degree of flexibility with regard to the investment ratio or holding period, which is particularly important for entrepreneurs, via a broad range of financing forms.
Value enhancement of sophisticated
Despite the recent dynamic development of the buyout market, DBAG does not expect a further increase in the number of mid-market MBOs in 2019. “Macroeconomic upheavals, such as those caused by Brexit and trade conflicts, increase uncertainty — this can affect pricing in the M&A business and market dynamics,” said board spokesman Grede. “For the existing portfolio, the challenge of selecting and implementing value-enhancing strategies — such as expanding the product range or entering new geographic markets — remains significant.”
Further information and the full results of the market survey and market statistics, including the complete list of MBOs in the German Mittelstand, are available on DBAG’s website (www.dbag.de).
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.