Record year for mid-market private equity investments in Germany: Management buyouts at historical highs in 2019

Record year for mid-market private equity investments in Germany: Management buyouts at historical highs in 2019

  • Trend observed during previous years is stabilising: Founders hand over their enterprises to financial investors
  • Stronger focus on enterprises from the healthcare and IT sectors
  • Torsten Grede Spokesman of DBAG’s Board of Management: “Private equity acts as a catalyst for family-owned businesses”

Frankfurt/Main, 30 January 2020 – Private equity keeps gaining acceptance with mid-market companies. This is evident in the high proportion of company founders and families amongst the sellers of enterprises to financial investors. Markedly more than every second management buyout (MBO) which took place in the mid-market segment of the German buyout market in 2019 involved the sale of a mid-sized company by private (family) owners to a financial investor. This represented yet another increase compared to previous years: in 2018, this share amounted to just over 40 per cent, having averaged around 20 per cent for the past ten years. Conversely, the share of transactions involving financial investors on both sides has fallen. Such ‘secondary’ buyouts are also losing importance in absolute terms – “Private equity can perform a key function as a catalyst for corporate development”, Torsten Grede, Spokesman of the Board of Management of Deutsche Beteiligungs AG (“DBAG”), commented on the current market figures. “Financial investors initiate a strategic re-positioning – for example, by enhancing companies’ operating performance, and by expediting growth, including through add-on acquisitions of smaller companies”, Mr Grede added.

Buyout activity continued to increase in 2019: with 51 transactions, financial investors in German mid-sized companies structured four MBOs more than in 2018 – yet another record level for this market segment since DBAG started compiling data in 2002. Founders or family owners sold to financial investors in 35 out of the 51 transactions. This often also involved handing over company management to successors. Three buyouts involved groups spinning off non-core activities by selling them to a financial investor; the remaining 13 MBOs were agreed upon between financial investors.

The analysis covered exclusively transactions where financial investors acquired a majority stake alongside the management team, and which had a transaction value of between 50 and 250 million euros for the debt-free company. The information was compiled from publicly-available sources, alongside estimates and DBAG research in cooperation with FINANCE magazine.

Private equity firms financed buyouts of German mid-market companies with an aggregate volume of approximately 5.4 billion euros in 2019 – also the highest level since 2002, the start of the data history. In 2018, the volume of this market segment stood at 4.8 billion euros. At 106 million euros, the average company value was virtually unchanged from the previous year. As in 2018, the large majority of transactions (32 out of 51) was attributable to the lower end of the segment (company value between 50 and 100 million euros).

Intense competition and fragmented market

Numerous investors continue to compete for investments in attractive mid-sized companies in Germany. 27 private equity firms were involved in the 51 transactions observed last year. “We see new competitors every year”, said DBAG’s Grede, noting: “This is testament to the market’s attractiveness, and also reflects intense competition.” Around 60 per cent of the transactions (31 out of 51; 2018: 22 out of 47, just under 50 per cent) were structured by multinational, pan-European private equity funds.

Deutsche Beteiligungs AG accounted for one MBO in the buyout list for 2019 (previous year: three out of 47 MBOs). DBAG structured three additional MBOs in 2019: in two cases, the transaction value exceeded 250 million euros, whilst the remaining MBO involved an Austrian company. Over the past ten years, DBAG achieved the highest share in this fragmented market (23 out of 335 MBOs, equivalent to 7 per cent). The next position in the market segment analysed is held by a competitor having structured 17 transactions; all other market participants achieved markedly lower readings.

Healthcare and IT services/software are the dominating sectors

The sector structure of the buyout market has changed dramatically over recent years: companies from the healthcare and IT services/software sectors accounted for around one-third (16 out of 51) transactions in 2019. Their average share was less than half this level for the last ten years. In contrast, industrial companies appear less frequently on the list of 2019 MBOs than in previous years: besides two mechanical and plant engineering enterprises, the list included ten manufacturers of industrial components – such as aircraft seats, semi-trailers for lorries, or steel profiles. Accounting for a share of just under 25 per cent, the industrial sector remains an important source for MBOs. Remarkably, not a single MBO amongst the 51 transactions observed involved an automotive supplier. Over the past ten years, this sector had accounted for an average of four transactions each year – more than ten per cent.

“IT and software companies, many of which were still in their very early stages at the turn of the millennium, have now reached a size and maturity that makes them attractive to financial investors”, Mr Grede said. He went on: “Companies in these sectors, which are still relatively young, face challenges such as internationalisation and the need to quickly establish a presence in their target markets. Leveraging its relevant experience in supporting enterprises, and by facilitating external growth through acquisitions, private equity can be a key partner in this context.”

The list of the 51 transactions is available under "News".