German hedge funds struggle to regain cachet | Business| Economy and finance news from a German perspective | DW | 26.02.2013
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German hedge funds struggle to regain cachet

"Super Return" is the motto of the world's most important gathering of private equity and hedge fund managers currently underway in Berlin. But German operators in the sector are cautious about that slogan.

If confronted with the term "locust", the head of the German Association of Private Equity and Venture Capital Companies (BVK), Matthias Kues, takes it rather calmly. When Germany's Social Democrats once used the term in an attempt to describe greedy and ruthless financial dealers, the image of Kues' sector was surely tainted, but the campaign also brought it a lot of publicity.

"The debate is still doing some harm whenever different things are talked about indiscriminately," Kues argues. Even within the SPD where the locust comparison was conceived, prominent party figures still can't tell the difference between private equity and hedge funds, he adds.

But there's also a trace of self-criticism. "I believe our business needs much more explaining", Kues says. He argues that the sector operates far too discreetly and doesn't know how to deal with the media, adding that the business has to open up more to the public. "We have to communicate positive deals, and when there are negative examples we have to admit our failures, while pointing out that investments can go wrong in other sectors, too."

Attractive mid-sized companies

About 1,200 enterprises in Germany were co-financed with the help of venture capital in 2012, with full-year investments of 5.84 billion euros ($7.66 billion) just staying 6 percent below those made a year earlier. The bulk pertained to majority holding deals or so-called buy-outs. The sector's outlook for the current year is optimistic. Owing to improved terms of financing, Kues expects a larger number of really big takeovers.

But medium-sized, family-run firms are also increasingly in the focus of investors. In 2012, minority-share deals climbed to an investment volume of 779 million euros. That business segment is bound to rise, with the next generation of company owners rushing into the market amid the current easing of the financial crisis.

Having the exit in mind

Kues say he's sometimes asked why the owner of a medium-sized company should sell to an equity investor at all. "People say those investors are locusts which just pretty up the bride only to filet, or cannibalize her later on, or whatever martial words are used," he recounts. "My argument is: what's wrong in seeing the bride appear prettier after the wedding ceremony; nobody would be against that, and in real life no one would think about fileting her."

Kues maintains that if an investor from his sector buys a medium-sized company, he or she guarantees to the biggest extent possible that the core part of the firm remains intact. And that wouldn't be the case, if a big industrial enterprise were to be the potential buyer, he argues, adding that whole divisions may fall victim with a view to achieving so-called synergy effects.

But that's only half the truth. Financial investors are rarely interested in long-term involvement. More often than not they focus on a favorable exit right from the start.

Logo of Douglas perfume chain Photo: Michael Gottschalk/dapd

The takeover of the Douglas retailer by financial investor Advent was a billion-euro deal

Two thirds of all investment companies within the BVK expect the number of corporate sales among one another to rise in the course of the year. "In the case of listed companies, financial players buy from one another almost on an hourly basis," says Kues. "But if we private equity companies buy shares from a rival equity firm, say, after five years you wouldn't call that hectic activities, would you?" But he warns that the sector could not thrive endlessly just on managing one buy-out after another.

Venture capital hard to get by

But start-ups continue to play a rather negligible role for private equity firms. According to the BVK, venture capital provided to such fledgling companies once again took an alarming tumble in 2012, totaling only 521 million euros and down by 25 percent from 2011 levels. BVK Managing Director Ulrike Hinrichs says Berlin is the main target for venture capital flowing into Germany, as US companies specifically invest in the German capital. "I'm also confident that business operations in that Silicon Valley of Berlin will pick up," Hinrichs says. "Not without reason fund operators such as Early Bird have pulled their teams out of Hamburg to relocate to Berlin."

But it's not only young Berlin Internet companies that have attracted money from abroad, with Germany being considered a safe financial haven amid the current sovereign debt crisis. And with that crisis slowly abating, even more capital is bound to flow into the country. According to the BVK, no other nation in Europe is currently more attractive to international financial investors.

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