The German Private Equity market continues to evolve dynamically with multiple new national and international private equity funds entering the market every year. As for many years, they are typically attracted by the large universe of small-to mid-sized enterprises (SMEs) and the promise of many family-owned businesses having to solve their succession issues.
In a generally difficult economic environment, however, the level of transaction activity remains subdued especially when it comes to larger transactions. While some private equity funds solely rely on transaction processes intermediated by M&A advisors, others have developed systematic approaches using specialized intermediaries and deal finders to reach out to family-owned businesses in a kind of “mass marketing” approach. This approach can and does lead to “off-market” transactions for some private equity funds, yet not enough to spark a wave of transactions.
When talking to owners of successful family businesses on the other hand – even those that do have a latent succession issue – it is not rare to hear that they get inundated with approaches from financial investors that they don’t even answer to.
Entrepreneurs see themselves confronted with multiple crises over the last few years combined with an increasing regulatory complexity and an acute and worsening shortage of qualified labor to name a few.
So, it is worth looking at the underlying issues family-owned SMEs are faced with nowadays and their motivations and needs when looking to solve the potential succession for their businesses. As far as issues are concerned, entrepreneurs see themselves confronted with multiple crises over the last few years (Covid-19 shutdowns, supply-chain disruptions, energy price hikes, etc.) combined with an increasing regulatory complexity and an acute and worsening shortage of qualified labor to name a few. In principle, this leads to an increased interest in solving successions early while at the same time the younger generation is somewhat less inclined to step in.
In the absence of a family-internal succession, a full sale of the company may be a solution but often other considerations come into play:
- A desire to step out of the day-to-day operations, but to stay involved in attractive growth opportunities that may exist for the business
- A recognition that solving a succession on the management level takes time and may be best done in a staged process which, however, means less control over the business and an increase in perceived risk.
- A recognition that in order to remain competitive in the face of the above-mentioned challenges significant investments may be necessary (incl potential M&A for consolidation) leading to an increase in the risk level
- A desire to secure some of the family wealth while staying involved and profiting from the further growth of the company
- An intent not to sell to a strategic buyer in order to ensure the integrity and continuation of the business based on a strong loyalty towards the company’s staff and community.
- A recognition that a financial partner may not only contribute financial resources but also serve as a sparring partner with critical know-how and networks to support the further development of the company.
- Reservations towards classic private equity funds related to the cultural fit, the use of excessive debt, restrictive governance requirements and relatively short holding periods
Increasingly, there is a class of investors that emerges and undergoes continuous professionalization that responds to the motivations and needs of family-owned businesses in the German market. They can be seen as an alternative to classic private equity funds putting partnering with family entrepreneurs at the centre stage of their strategy. These include players that are structured as classic private equity funds, yet are financed primarily by entrepreneurs and families and have extended their fund lifetimes. It may also be family offices or publicly listed evergreen investors that have put in place teams and investment processes to be able to professionally acquire, invest in and support family owned SMEs.
Increasingly, there is a class of investors that emerges and undergoes continuous professionalization that responds to the motivations and needs of family-owned businesses in the German market.
Luxempart, for its part, considers itself as one of the established investors in the German speaking private equity market fully focused on partnering with family entrepreneurs and other family-based investors to offer a solution to succession and growth situations. Having invested in the German-speaking region since 2008, we recently opened an office in Munich to further strengthen our presence.
The company is majority held by entrepreneurial families, combining the stability and professionalism of a listed group with an entrepreneurial approach and ambition. Rooted in strong family values, investments are long-term oriented, use no or conservative levels of debt and are done with a large degree of flexibility when it comes to transaction structures (minorities, majorities or anchor shareholdings in listed companies).
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