FINANCE Magazine Mid-Market Monitor - A return to growth

After two challenging years, the German private equity mid-market is finally picking up speed again. US tariff policy has made Europe a more attractive proposition for international investors, but new competitors are now challenging established market players.

The most recent FINANCE Mid-market Private Equity Monitor, compiled by FINANCE magazine in cooperation with Deutsche Beteiligungs AG (DBAG), shows the private equity sector in a period of transition. The German PE market has regained stability following a difficult phase characterised by a subdued mood and restrained investment activity. Deal flow has picked up noticeably, with increasing momentum in recruitment and a renewed portfolio development focus on growth stories.

International investors turn their attention to Europe
The changed geopolitical situation is a key factor driving this trend. The tariff policy announced by the Trump administration has triggered a strategic realignment of international capital flows. “The accelerating deal flow affirms our strategic focus on digital business models and software-driven solutions”, said Tom Alzin, Spokesman of the Board of Management of Deutsche Beteiligungs AG, adding: “We see Europe as an attractive investment location precisely because US investors need to shift their focus due to the new policy on tariffs.”

According to Invest Europe, US fund investors plan to re-allocate 15 to 20 per cent of their private equity exposure to Europe – an increase of between 25 per cent and 30 per cent compared with 2024. The introduction of a five per cent allocation ceiling for infrastructure investments by regulated investors and the increase of the private markets allocation ceiling for insurance companies and pension funds from 35 per cent to 40 per cent have further fuelled this trend.

While regulatory uncertainty has diminished the propensity to invest in North America, the European PE market is attracting more and more interest from international funds. Political stability, well-developed legal structures and the strong Mittelstand make Germany a preferred target market for private equity investments.

Exit readiness is now a strategic imperative
As well as the revival in investment activity, there is a growing focus among investors on being ready for exits. After years of extended holding periods and compressed returns, preparing portfolio companies for disposal has established itself as a key competitive edge.

Optimising operations is not the only challenge in this context, where the strategic positioning vis-à-vis a new generation of buyers is just as crucial. These buyers expect documented EBITDA improvements, validated growth strategies and clearly formulated value drivers that must already be implemented 12 to 36 months ahead of a planned exit.

New competitors challenge established players
Confidence is being tempered by structural changes in the competitive environment, with 67 per cent of PE managers surveyed seeing industrial holdings as their strongest competition, closely followed by family offices with 60 per cent. These new players benefit from longer investment horizons and lower return requirements and often have industry-specific expertise as well.

As Jannick Hunecke, member of Deutsche Beteiligungs AG’s Board of Management, explained: “The changing competitive landscape challenges established private equity players to further differentiate themselves through operational excellence and governance expertise. The market is taking a more selective stance but offers higher returns for those who invest in transformation skills.”

This development calls on traditional PE firms to refine their value proposition and to adopt more innovative approaches to portfolio development.

Growth stories at the core of the strategy
The survey also yielded encouraging findings concerning a renewed focus on growth stories. Following several years of cutting costs and enhancing operational efficiency, value-creation strategies are increasingly focusing on building new businesses, expanding the range of services and implementing strategic add-ons.

Sectors such as software and IT-Services and Software, healthcare technology and sustainable industrial solutions benefit in particular from this trend as they not only offer resilient business models but also scalability potential, which is particularly attractive for PE investors.

Outlook: Recovery in key areas accompanied by structural change
The survey results clearly show that the German mid-market PE sector is on the verge of a recovery in selected key areas. While the fundamental environment (from interest rate policy to regulatory stability) is wholly conducive to this, the new competitive landscape calls for strategic adjustments.

In future, PE firms will need to combine their traditional strengths in governance and operating value creation with innovative growth strategies and professional exit preparation. The trend is now for the market not only to reward financial engineering but especially genuine transformation expertise.

The coming months will show which players will be able to successfully meet the challenges of this transitional period and position themselves for the next growth phase in the German private equity market.

The FINANCE Mid-Market Private Equity Monitor is published twice a year, based on a survey of leading private equity firms operating in Germany. It provides comprehensive insights into the latest market developments and future prospects.
 

The full study can be found on Finance-Magazin.de (Paywall).