Germany's Allure for Private Equity Close Window FEBRUARY 27, 2006 Money Flows By Gail Edmondson Germany's Allure for Private Equity The country's industries are ripe for restructuring. With eager investors waiting, look for the pace of deals to pick up It was a rude slap in the face. Just as the world's premiere private-equity giants began touting Germany last year as the global hot spot for investing, local politicians lambasted them as predator "locusts" eager to strip assets and kill jobs for financial gain. But the ugly label didn't stick. Last week, as 1,500 fund managers and industry executives gathered at the Super Returns private-equity conference in Frankfurt, the mood was buoyant. "We feel a lot better about Germany in the last six months than we have over the last four years," says Steven Puccinelli, head of European private equity for Investcorp, which is targeting 20%-30% of its investments in Germany. JOB CREATORS. Unflattering as the locust headlines were, they now appear to have done more good than harm by sparking a healthy public debate and clearing the air of misconceptions. Since last summer when the barbs were first hurled, universities, industry associations, and accountancies published reports showing German companies owned by private-equity investors created many more jobs on the whole and grew twice as fast as those which weren't. A PriceWaterhouse study noted companies with private-equity investors increased jobs by 20% between 2000 and 2004, while German companies nationwide reduced employment by 5.7%. The Munich Technical University published a report showing private-equity investments created 420,000 jobs in Germany during the same period. Fund managers and investors quietly accelerated the education process by meeting one-on-one with politicians and labor leaders, explaining their business and growth goals, and highlighting the growing number of private-equity success stories. In 2003, Investcorp bought Utimaco Safeware, a medium-sized encryption-software company and helped it partner with IBM (IBM ) to expand internationally, driving revenue growth of 30%-40% a year. It sold the company in 2005 and reaped a gain of more than 400% on the initial investment. TOO STODGY. "We believe Germany is ripe for change," says Puccinelli. Investcorp raised a $300 million fund in 2005 and aims to invest half in the U.S. and half in Europe, targeting companies of $200 million to $750 million in size. Private-equity investors expect the deal-making pace to quicken this year in Germany, especially among medium-sized companies, which make up the backbone of Germany industry. Last year, the value of German buyouts grew to $32 billion. But if large real estate deals were stripped out, such as the $7.1 billion takeover of energy utility E.On's (EON ) property portfolio Viterra by the German arm of Terra Firma, the real action was in medium-sized companies, says Holger Frommann, managing director of the German Private Equity and Venture Capital Association. Germany's hulking $1.9 trillion economy is alluring to the kingpins of global private equity, because much of its industry remains rooted in manufacturing and has lagged the U.S. and UK in restructuring. "There is a tremendous amount of rebuilding and reorientation needed to bring German industry into the 21st century," says Peter Záboji, founder of the European Entrepreneurship Foundation and an adjunct professor at Insead in Fountainbleau. "SEEDS OF EXCESS." Speaking at the Super Returns conference, Blackstone Group co-founder and CEO Stephen Schwarzman noted Germany Inc. needs to sharpen its competitive edge to emerge from its growth slump. "German is a mature economy battling against low-cost manufacturers in Asia and Eastern Europe. One solution is to run companies more efficiently," said Schwarzman, whose fund has made investments of $13 billion in German companies. But Germany's relatively virgin market for buyouts is already pricey. And large companies are back on the M&A trail across Europe after a five-year absence, creating greater competition for private-equity investors in Germany and elsewhere. "The seeds of excess are there. If we keep bidding prices up, I worry what the outcome will be," says Schwarzman. "We are somewhere in nosebleed territory." For now, that's not stopping anyone from courting German companies. Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau Edited by Rose Brady Advertising | Special Sections | MarketPlace | Knowledge Centers Terms of Use | Privacy Notice | Ethics Code | Contact Us Copyright 2000- 2006 by The McGraw-Hill Companies Inc. All rights reserved.