Global Expert Guide

d Venture Capital market Q

In order to facilitate the widening of our investor base, we had the opportunity to place a very large stake in Fund II on behalf of ING, and in doing so attracted a number of new Blue chip investors raising € 104m in the process for our new fund.

On the LBO investment side, there are only three ways you can make money:

1.By de-gearing the firm, which raises the value of the equity

2.By growing profitability either organically or by acquiring other businesses; and

3.Potentially through multiple arbitrage when selling the business In the cases of the two portfolio acquisitions, BTC and Lila Bäcker, we were able to grow our platform investments inorganically significantly adding value to our portfolio companies. In Private Equity, we only make money if our investment grows!.

Q

Germany has long been viewed as a popular destination for investment. To what do you attribute this?

Germany has the biggest economy in Europe, and also has the largest population of small to medium size companies. Germany grew very successfully after the Second World War, and the post-War era created a number of entrepreneurs who built successful businesses. Compared to the UK or France, where much economic activity is centred around the capital, Germany is far more decentralised with many large industrial cities acting as hubs for a large population of small and medium-sized enterprises.

Germany is also very much an export economy, so it benefits from the growth in economies such as China, US, etc, and is known for the quality of its products. In my experience, the Germans are very reliable business partners, and are good people to do business with. They are used to international business and are open to foreign investment in their country.

Q

What, in your opinion, are the incentives and restrictions of foreign investment in Germany?

The main incentive is that there are some

really great businesses in Germany, and it is Europe’s largest economy so a good place to put money to work. Germany has many great engineers and encourages innovation placing great importance on the quality of its products and maintaining world-wide esteem for products “Made in Germany”.

Among the restrictions is the fact that some people would have problems with the language and this will deter certain types of investors. In reality, most German business people speak good English, however, it is human nature to be more at home in one’s mother tongue. Thus, whenever you buy or invest in a company, it is always best that you speak the language of the country you are investing in. For us, that’s not a problem as we all speak fluent German and are effectively a German business.

Another restriction is that the culture of Germany and the political environment is not as open to Private Equity investing as, say, Scandinavia, the US or the UK. Germans like to see long-term continuity in business ownership; they don’t like the concept of companies being traded back and forth every few years.

Q

Are those the main issues affecting Private Equity and Venture Capital in Germany at the moment?

Certainly a part of the issue. Another issue is the way companies have traditionally financed themselves, which has been different from the UK. Companies used to have more in-house pension schemes rather than outsourcing them, so their stock market developed more slowly.

There are also political, regulatory and taxation issues. The German tax environment is complex and continually in flux. Plus, from time to time, there is a tendency among certain social democratic politicians to blame Private Equity for corporate failures. However, these days, the industry can prove quite successfully that Private Equity has been beneficial to the growth of companies in Germany. Whether politicians wish to hear this is another matter.

Has this altered much during the last four years since the beginning of the financial crisis? If so, how?

What we are seeing now is considerably less availability of money. People are less inclined to commit themselves for long-term periods, which is necessary for the standard, 10 year private equity fund model. However, the industry has grown very successfully for most of my career. The availability of money going into Private Equity funds has lessened for the time being, but I believe this will be temporary as the industry continues to mature.

There have been many regulatory changes, particularly among insurance companies and banks. Banks are more or less withdrawing from funding Private Equity because of their own capital structure issues and the amount of equity they need to keep on their balance sheets.

We are seeing a lot of new regulation coming in, which is very expensive to implement and is quite complex. That is creating new challenges since these appear to tie heavy-handed and out of proportion to the level of regulation actually required to protect investors.

At the moment, we are awaiting the introduction of compliance legislation for Alternative Investment Fund Managers (“AIFM”), which is currently in the process of being finalised. This will significantly affect not just German fund management, but Europe as a whole. There is an awful lot of red tape being introduced at the moment, and at the same time the availability of bank finance for buy-out business has reduced significantly. Banks have become far more conservative.

Q

Is there anything else you would like to add?

After 24 years of working in Germany, I have to say it is a great place to do business. Whilst the recession has hit everywhere, it hasn’t hit Germany as bad as most countries. Germany has more reserves, is more conservative and is very resilient. It’s a great place to work and invest.