Driven by technological advances, regulatory changes and global economic challenges, the private equity industry is undergoing rapid change. Digital business models, cloud technologies and artificial intelligence (AI) offer enormous growth opportunities, but they also come at a cost. What trends are currently shaping the industry?
In an interview with FYB Financial-Yearbook, our partner Dr Tobias Fenck answers questions about the current changes and trends in the private equity industry.
1. How has the private equity landscape changed in this country over the last two years?
As we know, the industry has always been in flux, and we are currently operating in a difficult market environment. Based on my observations, some traditional sponsors are currently disappearing from the market or transforming into secondary funds due to weaker performance and failed succession planning. First-time teams/first-time funds are still venturing into the market from time to time, but are finding it much more difficult overall than they did four to five years ago. It is also apparent that pan-European mid-cap funds are increasingly focusing on investment activities in Germany. US investors are also showing renewed interest in the German market in view of the current political uncertainties in their home market. Larger buyout firms have recently discovered the smaller market segment and are also pursuing buy-and-build cases with their own vehicles. Overall, market consolidation is currently evident (flight to quality).
The fundraising environment (especially for larger funds) remains difficult, even though the outlook for Germany has been more positive overall since the federal elections. In addition, from an investor's perspective, the attractiveness of Germany (and Europe) seems to be benefiting from the uncertainty in the US market.
In terms of their portfolios, the funds are currently recording longer holding periods. There are fewer exits on the market, and overall returns are also lower. Continuation vehicles continue to grow in popularity as an exit channel.
2. Private debt continues to expand worldwide and open up new financing channels. How is the sector developing in Germany?
The private debt market in Germany has developed enormously in recent years. This applies to both the number of providers and the number of transactions financed. There are now certainly around two dozen debt funds regularly featured in league tables in Germany, with a handful of them providing financing particularly frequently. The providers are often German subsidiaries of internationally active funds with a US or UK background. In terms of content, the focus is clearly on acquisition financing. Debt funds now regularly provide more financing than banks on an annual basis. Similar to private equity, private debt also has a lot of dry powder, which leads to high competition for ‘good’ transactions. Due to their greater flexibility, debt funds are also more willing to consider more unusual financing structures.
3. What observations have you made on the transaction market? Are there many auctions or rather individual deals?
The expected strong M&A year of 2025 has so far failed to materialise, given the outcome of the US elections, high energy prices and the general economic and regulatory environment. However, a year-end surge is now on the horizon. Overall, there are fewer transactions on the market, particularly larger mid-cap and large-cap transactions. Proprietary transactions are also becoming increasingly rare. This perception must, of course, be viewed in relation to the very strong M&A years of the past, when very high (and in some cases excessive) prices were paid for assets. Transaction and trading multiples are slowly declining, but price expectations remain high, meeting investors who, although sitting on a lot of money, are acting very cautiously overall due to the general conditions. Business models are being intensively tested for AI substitutability. This also makes exits more difficult, especially for companies that were purchased at too high a price in the former better market environment. Exits with higher multiples are currently only being seen for selected assets (including in the software and AI sectors). Auctions are also being held for smaller assets, often with a limited field of bidders. Auctions are taking longer and are more laborious overall. Only for very attractive targets in selected industries are truly competitive processes currently being seen on a regular basis in the mid-cap segment.
Click here to read the interview: Die Private Equity-Branche ändert sich massiv - FYB Financial Yearbook
