Rise in founders selling businesses to buyout firms boosts German mid-market PE to record levels

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Germany’s mid-market has recorded a record level of private equity investment as founders increasingly hand over their businesses to buyout backers, new research shows.

More than every second MBO that took place in the German mid-market last year involved the sale of a mid-sized company by family owners to a financial investor, investment house DBAG said.

Last year the share amounted to just over 40 per cent, having averaged around 20 per cent for the previous ten years, with the number of deals featuring financial investors on both sides having taking a resultant slump.

DBAG board spokesperson Torsten Grade said such ‘secondary’ buyouts were also losing importance in absolute terms.

He said, “Private equity can perform a key function as a catalyst for corporate development.

“Financial investors initiate a strategic re-positioning – for example, by enhancing companies’ operating performance, and by expediting growth, including through add-on acquisitions of smaller companies.”

Grede added that the segment was seeing new private equity competitors every year, with 27 firms involved in the record 51 deals done in 2019.

About 60 per cent of the deals were structured by multinational, pan-European buyout funds, up from just under 50 per cent in 2018.

DBAG said healthcare and IT services and software are the dominant sectors for investment, accounting for about one-third of deals last year.

Their average share was less than half this level for the last ten years, the firm’s research shows, adding that industrial companies seem to have suffered a related slide.

Grede said, “IT and software companies, many of which were still in their very early stages at the turn of the millennium, have now reached a size and maturity that makes them attractive to financial investors.

“Companies in these sectors, which are still relatively young, face challenges such as interna-tionalisation and the need to quickly establish a presence in their target markets. Leveraging its relevant experience in supporting enterprises, and by facilitating external growth through acquisitions, private equity can be a key partner in this context.”

DBAG, a listed private equity company, is currently out raising its eighth flagship fund, which is expected to close on about €1.1bn across the main fund and a side-pot.

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