THERE ARE FEW countries in Europe that hold as much potential for private equity investors as Germany. It has the largest economy in Europe, powered by a quarter of a million privately owned Mittelstand companies – a population of mid-market businesses that enjoy an international reputation as cash-generative, export-orientated and capable of occupying global market-leading positions in high-margin industry niches.
Despite this, it has proven a tough market to crack for many ‘outside investors’, those not embedded in the local markets. Elsewhere, they say ‘money talks’, but in the German industrial heartlands, unless you can demonstrate a cultural affinity and a similar set of values with business owners and the communities they support, that conversation will be short.
As a result, while Germany has a well-established private equity market, its activity level is lower than might be expected, given the size of its productive output. Over the ten years to the end of 2021, there were 1,008 private equity deals in Germany worth €164bn, compared to the UK’s 2,159 deals with a value of €270bn, according to the Centre for Private Equity and MBO Research.
Equistone Senior Partner Marc Arens, recently appointed as the firm’s Country Head for DACH/NL, says building a successful private equity franchise in the German market has always required a combination of patience, local presence, cultural insight, and an investment in origination.
“Mittelstand companies are family run and have been passed down through the generations. Owners feel a deep sense of family and community obligation,” says Marc. “When they are thinking about doing a deal, extracting maximum profit is not the overriding priority. They want the company to go to a good home,” Marc says.