The image of the once much-maligned financial investors amongst company owners has improved sustainably in the past: for owner-managed SMEs, cooperation with a private equity company has not been taboo for quite some time now. This has also been confirmed by the results of the annual survey on “Trends in the German buyout market” conducted by Deutsche Beteiligungs AG (DBAG).
Well over half of all management buyouts (MBOs) in the mid-market segment of the German buyout market during the period between 2016 and 2020 involved the sale of a mid-sized company by private owners to a financial investor. Between 2004 and 2015, this ratio had been just eleven per cent.
It is quite apparent that a sustainable development has been taking place here, whereby an increasing number of company owners are considering cooperation with private investors – and not just when it comes to succession. In this article, we showcase current examples:
Growth with a strong partner
In June 2019, DBAG Fund VII and DBAG invested in two IT companies, merging them to form Cloudflight GmbH, where around 350 software and cloud computing experts offer strategic advice on digitalisation, IT platform and architectural design and software development to SMEs and large corporate groups, supporting 24/7 cloud operations. For co-Managing Director Christian Federspiel, the sale was “not a difficult step to take”: recognising ever-accelerating progress, he had started to ask himself – soon after having founded the company – how further corporate growth could be financed.
In his view, resorting to loans or subsidies to cover the significant financing requirements for necessary investments in the areas of artificial intelligence or the Internet of Things would not have been viable. “We realised that stronger growth would only be possible in cooperation with an investor”, Federspiel explains his decision, noting that in this way, Cloudflight also had the opportunity of getting key valuable skills and expertise on board. By way of example, he cites the establishment of a strong Advisory Board which acts as a valued sparring partner for strategic decisions. He believes that the know-how of a private equity partner also pays off when it comes to buying other companies: “Here, we can benefit from the sound experience in supporting such processes”, Federspiel says.
Creating a European market leader
Multimon GmbH – a DBAG investment in 2020 – is a key example for the opportunities which may arise from cooperation with an investor for the long-term continued existence of one’s own enterprise. For Edward Skube – already one of the managing partners at the time – cooperation with a private investor opened up the opportunity for expansion with the aim of becoming a “European market leader”. “We strive to position our company for long-term success and – as the core company within a market-leading group – intend to continue our growth path.” A first acquisition was completed right after the start of the investment. Knowing they have a strong investor by their side, Multimon’s 800-odd employees can rest assured that the company remains on its path of expansion.
Multimon, founded in Kirchheim near Munich in 1982, manufactures turnkey fire protection systems and offers its customers support from a single source – starting with the planning process over the installation right up to commencement of operations. Multimon also takes care of maintenance work, which secures long-term income from maintenance contracts.
One of the reasons for the sale of the company was its size, with revenues of 77 million euros (2020) – large enough for Multimon to remain the core company within a growing group of companies. As Edward Skube explains, trust was the main factor for him and his team when choosing a private equity partner. “After all, you are going to be working together over a longer period of time.” For Skube and his management partners, the right way to go was retaining a stake in the company by way of a re-investment.
Solid growth? Only with an investor
“It was my aim right from the beginning to improve radiology and lead it towards a successful future,” says Thilo-Andreas Wittkämper, Chairman of the Executive Team at blikk Holding GmbH. Alongside his medical job, the radiology specialist wanted to act as an entrepreneur, and took care of effective processes in his practice at an early stage. And his ideas bore fruit: by 2019, his company had several practices, with more than 500 employees.
One of Wittkämper’s key entrepreneurial rules was not to focus solely on money. His three priorities are patients, employees and quality. His decision to cooperate with DBAG was based on the long-term goal of improving healthcare. “At some point along the road I realised that I would only be able to walk the next miles with a strong partner,” Wittkämper explains the rationale behind the sale. “A financing partner who understands that healthcare revolves around the patient and who recognises that motivated employees, treated with respect and appreciation, are a must: this is the ideal partner to improve radiological services in Germany. In DBAG I found all of that.” In the meantime, the radiology group blikk has expanded and now employs more than 1,000 staff, with growth set to continue in the next years: “We are looking at – and closely scrutinising – numerous practices in Germany that are interested in joining us,” announces Wittkämper.
National association BVK: market is increasingly open to PE
“As a sector association, we have been noting that the market has become more open to the idea of private equity companies and external investors in the past years. Many entrepreneurs are recognising the opportunities associated with equity capital,” reports Ulrike Hinrichs, Executive Board Member of the German Private Equity and Venture Capital Association e.V. (BVK). She adds that growth financing, succession arrangements, and innovation are the main areas, and that private equity companies have also proven to be an anchor of stability during the coronavirus pandemic, helping their portfolio companies navigate the crisis in their position as partners with a long-term view.
According to Hinrichs, the ‘capital’ issue is only one factor, with equity capital as ‘smart money’ increasingly gaining importance. In her view, entrepreneurs are increasingly viewing investment managers as sparring partners for operational and strategic issues, appreciating their advice and sector expertise.
One of the reasons, says Hinrichs, is the next generation’s more international education and training. “Many young talents study abroad, and especially in Anglo-Saxon education, PE financing forms are far more common.” She goes on to state that the German market has many openly communicated positive examples from the recent past to show for, such as Rossmann, Douglas, Reno and Rodenstock, which has helped dispel prejudice. Concluding her comments, Hinrichs says that SME financing via banks is becoming increasingly difficult due to regulatory requirements, thus making equity capital more attractive – a gap that private equity companies are well-positioned to exploit.
Trend towards minority investments
Christian Wewezow, former National President of Wirtschaftsjunioren Deutschland e.V. (WJD) and Managing Partner at Clockwise Consulting GmbH, has observed that, increasingly, it is younger company owners or successors to small and medium-sized enterprises that are increasingly turning towards the private equity sector. Wewezow is now managing his own private equity company and, in the past few years, has held numerous discussions on this topic with companies wanting to know how to successfully cooperate with private equity.
According to Wewezow, growth financing is the main reason for collaboration with private equity investors. He continues to state that there is a trend towards minority investments; after all, not everybody is willing to pass on the reins and thus relinquish control. “The next generation is thinking more closely about these possibilities,” he says, adding that international pressure, especially from Asian markets, is also increasing in industry and commerce. As a result, companies have to focus more closely on balancing investments and risks.