Buy-out firms embrace Germany—and vice versa

KKR IS ON a roll in Germany. On July 4th the American private-equity firm announced its takeover of a majority stake in heidelpay, a payment-processing firm. A day later Axel Springer, a giant publisher, said that more than 20% of its shareholders had agreed to sell their shares to KKR, bringing a full takeover by the Americans a step closer. Last year KKR opened an office in Frankfurt. Its European boss is Johannes Huth, a German. Since it entered the country in 1999 it has spent $5bn on buying more than 20 German companies, including Arago, a maker of artificial-intelligence software, Hensoldt, a defence-electronics business, and GfK, a research firm.

For private-equity companies this marks a turnaround no less profound than those they try to engineer at the businesses they acquire. In 2005 Franz Müntefering, then boss of the Social Democratic Party, described them as “swarms of locusts that fall on companies, stripping them bare before moving on”. These days the locusts are increasingly seen as a force to help companies improve performance (not strip assets) and create jobs (rather than destroying them). KKR says it has increased the workforce of its German, Austrian and Swiss companies by an average of 8% from the moment of purchase to divestment.

Indeed, rather than fend off KKR’s advances, Mathias Döpfner, Axel Springer’s boss, actively sought it out as an investor. To win employees over to the deal, Mr Döpfner invited Mr Huth to one of his regular staff town-halls. Last month Osram, a struggling maker of lights, said it is fully behind a €3.4bn takeover bid from Bain Capital and Carlyle, two American buy-out behemoths.

German conglomerates have long been happy to offload unwanted parts to private-equity companies. Siemens sold its dentistry-equipment arm to Permira, a British firm, in 1997. KKR bought Hensoldt from Airbus. Buy-out firms are also becoming an important source of capital for the Mittelstand, the small and medium-sized companies that constitute the German economy’s backbone. Thousands of these enterprises already have private-equity firms among their shareholders.

This year 250 private-equity fund managers surveyed by PwC, a consultancy, named Germany as Europe’s most promising market by a long way. They are drawn by its stable politics, skilled workforce and steady economic growth. Nine in ten told PwC that Germany will be interesting for private-equity investments in the next five years (one-third as many said the same about Brexit Britain). Eight out of ten said they will increase their German holdings.

The number and size of private-equity deals in Germany are both smaller than in Britain or America. “The market has matured but remains relatively uncharted,” says Steve Roberts, PwC’s head of private equity in Germany. That leaves more opportunities for the cash-rich locusts to swarm around.

This post was originally posted at https://www.economist.com/business/2019/08/10/buy-out-firms-embrace-germany-and-vice-versa.

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