News & Analysis

Germany's relationship with private equity has historically been a strained one as politicians pushed back against what they saw as the invasion of private capital targeting domestic businesses—with one senior democrat politician in 2005 likening the industry to a "swarm of locusts." Over time, the country has seen billions in PE money flood into the market—more than $30 billion last year, according to PitchBook data—and the hostility that was once felt appears to have lessened. Nothing illustrates this point better than 3,000 members of the industry congregating in Germany's capital for private equity's annual get-together—SuperReturn International.

From all four corners of the globe, industry heavyweights gathered last week to discuss the most pressing topics facing the industry today. Below is a recap of the a few of the major themes that were highlighted.

Coronavirus spreads fear

As evidenced by the abundance of hand sanitizers and air kisses, fears surrounding the coronavirus were well and truly present in the halls of the InterContinental Berlin. Last-minute cancellations saw panels rearranged and more than a few empty seats as some speakers and attendees determined that a free lunch with their peers wasn't enough to justify possible contamination. For those who did show up, the alarming expansion of the disease was on everyone's mind.

Coronavirus has already weighed on the public markets, pushing a decline due to implications for manufacturing and supply chains and wiping some $5 trillion off world stocks last week, according to NBC News. The Organisation for Economic Co-operation and Development has recently downgraded global growth forecasts to 2.4% in 2020, down from 2.9% in November. And there are fears that the private equity community could be next.

"We have to be concerned," Kewsong Lee, co-CEO of The Carlyle Group said in a keynote interview. "No doubt in short term there's an impact, my guess is the impact will be greater than people think because this is such an unknown and uncertain situation that is still evolving. People are just starting to appreciate the magnitude of what could be happening."

While it might be bad news for PE as a whole, those who are focused on distressed assets appeared much more optimistic. An industry executive told PitchBook that if the disease were to spread further and areas such as retail, travel and logistics continue to be disrupted, it would create massive opportunities to pick up assets for less in anticipation of an eventual v-shaped recovery.

The late late cycle

Never before have the words "late cycle" been used so frequently than at a conference discussing the state of private equity today. It was admitted by all speakers that valuations are running high and that it is all but impossible to find cheap assets in either the US or European markets. While the impact of coronavirus has sparked concerns that the disease could be the catalyst to the next recession, a possible recession didn't seem to cause much worry to panelists who still see opportunities for growth in the market.

In a keynote interview, Ares Management CEO Michael Arougheti noted that conditions in the PE market have felt late cycle for upward of five years. "We still have accommodative central banks, we still have significant liquidity in the markets supporting asset values, we have full or near-full employment of the developed world and we have a commitment to low interest rates. So, this idea that we're late cycle and all hanging off our chairs waiting for the markets to roll over may just not be the case. … I think if we had all accepted that we were late cycle five years ago because we were trained to expect a recession every seven years like clockwork, we all would have missed a lot of return."

One senior member of the European PE industry told PitchBook that a downturn in the market would have the added benefit of "culling the herd" in terms of PE managers. "A lot of firms and managers that have come up in the post-financial crisis days haven't been tested yet in a down cycle. They might have good returns now but a recession will separate the good from the average and likely result in a slimming down of the industry," he said.

The bane of the private equity world

Aside from the coronavirus, there was another shadow over SuperReturn, courtesy of Bain & Company's Global Private Equity Report 2020. The study found that PE returns have lagged behind public over the past decade for the first time. Based on its finding, investors who put money into PE have made an average annual return of 15.3%, compared with the 15.5% they would have made putting the money in the S&P 500.

PE firms were very vocal about the attributes of the industry and in typical PE fashion urged a more long-term view than the past decade. Coincidentally, the Bain report showed that private markets outperformed the S&P 500 over a 30-year period. And as one industry executive stated, a lot of the great public companies started off private anyway.

Nevertheless the report shines a light on the increasing difficulties of finding good deals at the right price amid fierce competition and high valuations. Where it may once have been possible to generate returns through cutting costs to the bare minimum, the PE industry is now looking to create sustainable value through cash flow growth and improving operational metrics.

Ironically, one area that PE execs are targeting is the public markets. Public-to-private deals have been gaining in popularity over the past couple of years with an increase in capital going toward these types of deals. But, according to one PE manager, the main opportunities lie in corporate carveouts. To illustrate that point, German industrial giant Thyssenkrupp agreed to sell its elevator business to an Advent International- and Cinven-led consortium for €17.2 billion (about $18.9 billion) on the same day that SuperReturn drew to a close.

"Corporations are always under pressure to meet quarterly goals and they don't have the advantage that private equity has to take things slow," said the PE manager. "Heading into a less favorable climate, big companies are going to want to divest their non-core or underperforming units to keep shareholders happy. This will create great opportunities for PE firms to turn struggling divisions into strong businesses by taking a long-term approach."
 

Related read: For more on activity in Germany, download our 2019 DACH Venture Ecosystem FactBook.

Featured image via Marcello Zerletti/EyeEm/Getty Images