German Private Equity Conference
29th November 2016
The Westin Grand, Frankfurt am Main
Written by Rebecca Ford
The German Private Equity Conference 2016 came at a time of extreme political and economic uncertainty in Europe, and this unstable future dominated much of the discussion in our Opening Panel. With a diverse panel featuring Limited and General Partners from throughout the DACH private equity market, we were able to reflect on 2016 and look ahead to 2017 with a variety of insightful perspectives offered by the speakers.
1. DACH in 2016: high activity and high competition
Ralf Huep, managing director at Advent International, began the discussion by describing the market as “surprisingly unexpected” and favouring sellers with high multiples, which meant that investors had to concentrate on companies which they were sure had growth potential. Bastian Lueken, managing director in Europe for Platinum Equity, agreed that the market was good for companies with high-quality assets to sell, but difficult for those looking to deploy capital. Max Römer, founding partner and chairman at Quadriga Capital and Invest Europe, described the market as “very equilibriated”, with very similar sums in total investment volume (47 billion EUR), fundraising (47 billion EUR), and divestments (40 billion EUR). With 5,000 companies bought and 2,600 companies sold, Bernd Türk, managing director at Harald Quandt Holding, noted that DACH is a good region for private equity, due to its skilled workforce, stable conditions, economic growth, and good infrastructure and tech systems.
“How can you make money? It’s pretty easy, you just need to be selling.” – Ralf Huep
2. Two essentials: differentiation and diversification
Our speakers largely agreed that differentiation and diversification are of importance for GPs and LPs respectively in terms of returns. Max Römer added that GPs also must have a sustainable business model, as well as portfolio companies with genuine room for improvement in order to generate good returns. For Bastian Lueken, differentiation is what sets GPs apart: “What is it that you can do with the particular asset at hand, that other people can’t?” He made it clear that the more a GP can offer effective and sustainable solutions for cost reduction and margin improvement, the more attractive the deal becomes. Rhonda Ryan, managing director and head of EMEA at Pavilion Alternatives Group, encouraged GPs to invest when they think they have a unique offering, but if they are sacrificing multiples in order to do so, then it is not a good strategy to pursue.
3. ESG will be the future of impact investing
Max Römer outlined the history of Environmental Social Governance, and said that GPs are being measured by their ablity to implement it in their portfolio. Since its beginning in the Netherlands around a decade ago, it has developed to the extent that many Dutch LPs simply would not invest in a GP with no ESG standard practices and compliance programmes. Rhonda Ryan agreed on the importance of ESG in the future of private equity, as it is beginning to gain momentum in the USA’s market, and these American trends often end up reflecting on other markets globally. She also supported it generally, describing it as “good business sense”: “if you’re running a company efficiently, you’re inclusive, you’re diverse, you’re socially responsible, it just makes for a better business”.
“Looking into a crystal ball, I’m not convinced that this year is going to be a great vintage year, but as LPs we need to keep investing throughout the cycle.” – Rhonda Ryan
4. Brexit won’t necessarily benefit DACH
The ultimate European buzzword of 2016 did not escape our speakers’ notice, but their outlooks for how Brexit will affect the DACH region were not entirely harmonious. Max Römer suggested that British GPs will no longer be able to market their funds in Europe and so “there is a number of British GPs considering a move to the continent”. Ralf Huep was less optimistic, predicting that those moving would not select DACH, but rather Holland, Luxembourg, or Ireland as their new focus. Rhonda Ryan took a different approach, discouraging GPs from relocating and suggesting instead that they should stick to the markets, languages, and cultures that they know. However, Huep’s vision for private equity in the wake of uncertainty remained positive, as he advocated that change creates opportunities. Ryan echoed this, saying that the uncertainty of Brexit could allow GPs to take advantage of circumstantially cheaper deals.
5. The future could not be further from certain
All the speakers were reluctant to make predictions about the year to come, with the largely political reasons cited as Brexit, the Donald Trump presidency, the Italian constitutional referendum, and the French and German elections. The only certainty expressed, by Bastian Lueken and Ralf Huep, was that the wave of succession deals predicted for DACH twenty years ago are simply not happening on the expected scale and that deals are “few and far between” (Lueken). With the only certainty for the future being uncertainty, both Lueken and Rhonda Ryan emphasised the need for the expectation of a downturn during the holding period of a deal, though Ryan also noted that despite a cautious approach, investments must continue throughout the cycle.
The Opening Panel of the German Private Equity Conference brought us some interesting insights from top players in the DACH private equity industry, and although looking ahead is significantly more difficult in the current environment, all of our speakers found cause for optimism somewhere along the line. It is a climate which brings challenges, but naturally when some doors close, others may accordingly open, and in the investment industry, every type of environment benefits at least one link in the chain. Ralf Huep summed up the year to come, saying that “It’s all about timing… and let’s hope we’re all getting it right.”
Stay tuned to find out more about the upcoming GPEC official report!