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PILOTpartners DACH region partner reports
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 DACH restructuring and turnaround opportunities favour private equity
There are two factors that appear to be driving private equity business on the continent. One, is that the majority of private equity funds have substantial capital reserves to safeguard their existing portfolio companies; and more importantly, to enter into new engagements that take advantage of excellent opportunities. And two, is the increasing number of privately owned businesses that require re-structuring. The expertise of private equity firms in this area provides them with a clear advantage as potential suitors, but when it’s their portfolio companies that require a new focus, traditional, hands-on management strengths are what could be in fact missing.
In a recent survey, Deutsche Bank’s DB-Research predicts that small and mid-sized M&A activity will dominate the coming private equity ‘season’. While the driver for profitability through leveraged financing at low interest rates is viewed to be over for the time being, there is a new call for traditional operational and strategic management capability to fix losses from the recession and previous years’ excesses. Bringing in such traditional qualities will restore confidence. DB-Research concludes that the core PE business model is sustainable, especially if PE succeeds in mobilising such management capabilities. This however is not the area of expertise of local PE firms in the DACH region (Germany, Austria and Switzerland): Germany only has 5 to 10 turnaround investors, which means only 0.5% (2008) of all private equity investments is flowing into this neglected segment.
As ‘classic’ firms in the asset class are increasingly exploring this segment, this is bound to change. Present timing is exceptionally favourable for new entrants: valuations have dropped significantly and troubled companies can be acquired at fire-sale prices. Investments of PE funds conducted in the boom years of 2007/2008 are suffering badly from the downturn. Historic price levels, combined with leverage financing, are troubling these funds and their portfolio companies and providing new opportunities for secondary takeovers.
The volatility and uncertainty of the financial markets are fuelling this market opportunity, notwithstanding that turnaround and restructuring plans require fresh capital. The limited availability of bank liquidity for both new deals and to support restructurings is often tied to fresh equity and other restrictive commitments. Cash generation by the sale of (non-operating) assets may very well not be an attractive financial or strategic option under the prevailing conditions.
Opportunities for UK investors in DACH
Compared to frosty conditions on other parts of the continent, Germany and the other DACH countries are interesting targets for UK based funds, especially those specialising in private equity backed restructurings, distressed debt and secondaries.
Of course if a restructuring is not supported by present shareholders or potential investors, a corporate crisis will provoke a quick death. To file for bankruptcy is still seen as ‘ultimo ratio’ in Germany, but we are seeing an increasing willingness for turnarounds if the process is started at an early stage. Strategic investors are in the market to acquire insolvent/near insolvent, but otherwise interesting, competitors under bargain conditions, i.e. GM Europe/Magna, Karstadt/Metro, Porsche/Qatar.
 To be able to navigate the distressed corporate marketplace through stormy waters, local distressed investors typically acquire a majority, if not a 100% shareholding. Besides refinancing, the investment will require the mobilisation of strong operational and strategic management skills, alongside the previous management (if still in place). This is a vital difference to the prevailing local ‘growth’ investment strategy, which often attracts multiple funds to co-invest in minority positions relying on a competent management team in place. This is one of the most dominant “killer” or “no-go” criteria for DACH private equity firms to commit to new investments. Therefore, the opportunity for non-DACH distressed investors is the lack of exactly this focus within local PE firms.
The German state of mind
“Mittelstand” (mid-market, predominantly family owned) companies in turnaround mode bear sensible prices. However, UK distressed investors will often have to deal with German shareholders who will have problems departing from their “principles of hope”, instead of exercising sound turnaround common sense. That’s why it may well take an extra effort to convince sellers, who, while waiting, run the risk that their distressed business turns into a hopeless €1 basket-case.
Turnaround & Restructuring Managers in DACH countries
The inherent complexity of distressed investing, together with critical time constraints and gaps in the existing management team, may require teaming up with “hands-on” and experienced interim managers for defined turnaround and restructuring functions. Alpha Management operates in much the same way as PILOTpartners with a pool of independent managers, with sector-based restructuring and turnaround expertise, to deliver the following management functions:
- Pragmatic business analysis to eliminate the reasons for the crisis in the first place; designing the future rationale, business model and action plan;
- Filling of management gaps, Alpha/PILOT introduces and provides experienced (interim) CEOs/CFOs/CROs to step into leadership roles from day one;
- Immediate cash flow management;
- Economic, strategic and operational restructuring;
- Regaining credibility and time for recapitalisation to stabilise the balance sheet;
- Clear cut target and results oriented progress reporting.
Pieter Kraan, Partner
Alpha Management GmbH
Mülheim
Germany
E: kraan@alphamanagement.eu
T:+49 208 302 509 86
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