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 Cracking the code to German private equity investment in 2009 - By Pieter Kraan, Alpha Management
In a two part series, Pilot’s Log takes a look at why Germany and other DACH countries are proving to be 2009’s most compelling story for private equity targets. In this edition, Pieter Kraan, a private equity partner with interim management provider AC Alpha Management GmbH, analyses why the availability of high quality, self-motivated managers is more vital now than ever for UK & US private equity investors in Germany, Austria and Switzerland.
Germany’s middle market, or “Mittelstand”, holds its own in the global scheme of things when it comes to many sectors, such as capital goods, machinery, engineering, medical, automotive suppliers, food and beverages, logistics, chemicals, pharmaceuticals and bio-tech. In spite of recessionary factors and the downturn of the German economy, the size of the overall market and volume of deal flow continues to make German -speaking Europe the most sought after market for the investment activity of UK -based (including US owned) private equity firms.
Like many markets, the pricing of deals in Germany, Austria and Switzerland has become more realistic. But private equity penetration in these markets has yet to match UK levels, which means more quality targets to choose from. Current opportunities from global industry restructurings include Opel/GM, Continentale, and Metro/Kaufhof/Arcandor. And like their bigger siblings, the “Mittelstand“ is full of opportunities, namely those involving company founders struggling with succession issues and looking to private equity as an alternative solution to their present situation.
 Finding the focus
With positives, come negatives. The most notable barrier to growth and stability at present in DACH countries is the lack of CEOs and CFOs with experience of working in leveraged buy-outs. There is also the fact that DACH management teams are less experienced in financial management; they tend to focus more on technological and ‘marketing value’ drivers.
Without a primary focus on financial management, an LBO will never really get off the ground. This is where UK and US private equity managers start to see a talent gap with existing management and where an interim manager is most needed to ensure investor expectations are met.
UK and US private equity investors could see opportunities when sizing up DACH targets resulting from the lack of sector experience and sector specific value management within local private equity firms. Poor local understanding of the execution of pre and post deal management mobilisation during the critical first 100 days is often terminal and uncompetitive tax regulations for domiciliation of funds (but not for their targets) could force local investors to domicile outside their target countries. However, the importance of overcoming socio-cultural differences and language barriers should not be underestimated by non-German speaking private equity investors.
Investment success in DACH countries as well as elsewhere in mainstream Central Europe increasingly requires importing top consulting, non-executive and senior management expertise from the UK and Germany for example, to handle commercial due diligence and First 100 Days projects working closely with on-site management.
To tap an investment’s full potential, especially now that prices are more realistic, certain aspects have to be in place to make the deal run smoothly and keep deal costs down. These include diligent management selection, raising the operational and strategic performance of a portfolio company and value-oriented management.
Having the right people in place, just-in-time, to perform key due diligence functions is crucial to ensure the potential for value enhancement and that the proper investment decisions are made.
Bridging the gap
Understanding business language, culture and values is also crucial. Take for example the fact that “Anglo-Saxon” countries have a long tradition of focusing on the consistent increase in shareholder value as a driver for corporate actions whereas in Germany, management focus is often directed towards traditional qualities like reliability, punctuality and quality. This makes it doubly important to align the management team’s mindset to changed objectives. An interim manager is ideally placed to see this through.
It is essential that shareholder value oriented policies of the private equity investor should be implemented in the first 100 days. Looking at successful German/DACH investments that we have worked with, the impact is widely noticeable from the beginning. Consequently, to maximise investment success the project may require (on a case by case basis) the following:
• Resourcing of sector specific, project and/or seasoned CFOs who understand the local market to ensure strong due diligence and evaluation of the economic rationale of the investment.
• A strengthened and more aligned management team.
• An ability to mobilise such management resources just-in-time.
Sometimes the only way to get this done is through a flexible sourcing of external independent executives, who by remit will be complementary and aligned to the existing management as well to the private equity investors.
When selecting an interim executive through a specialised interim placement firm, it is unquestionably important to ensure the provider understands the requirements and expectations of a private equity -led investment.
In the next Pilot’s Log Pieter Kraan will reflect on the challenges for private equity investors handling turnaround and restructuring situations in the DACH countries.
If you can’t wait until then to hear from Pieter, please get in contact with him:
Pieter Kraan,
Partner, AC Alpha Management GmbH
Private Equity Practice
kraan@alphamanagement.eu
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