Frankfurt. The prospect of rising interest rates will not have a significantly negative effect on financial investors this year. Experts therefore expect large transactions, especially in the second half of the year.
“Although investors are keeping a close eye on the development of interest rates, there is still a lot of money on the market that is available for investments. The bottom line is that the expected interest rate development will hardly slow down the investment activity of private equity houses, especially since the pipeline is currently very well filled,” says Sandra Krusch, partner and head of private equity in the Europe West region at the management consultancy EY (Ernst & Young ).
If things go well, a double-digit number of transactions with a volume of one billion euros or more will be seen in the current year. Private equity funds buy companies or parts of groups, restructure them and sell them on following three to seven years at a higher price or list them on the stock exchange. Higher interest rates will make acquisition loans more expensive.
Last year, more transactions were carried out in Germany than ever before: the number of investments rose by 34 percent compared to the previous year from 225 to 302 and thus to a new record level, according to an EY analysis.
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However, smaller and medium-sized transactions dominated – in 2021, addresses from industry often played a role in the very large transactions. Therefore, the value of the purchases made by financial investors fell from 34.2 to 26.2 billion euros.
“The appetite for takeover is greater than ever”
The largest private equity transaction of the year was the takeover of the ceramics manufacturer Ceramtec and the purchase of the shoe manufacturer Birkenstock for around 3.8 billion euros each. The financial investors Hellman & Friedman and EQT won the bidding war for Zooplus.
According to EY, a total of 762 company acquisitions were carried out in Germany last year, an increase of six percent. 40 percent of the deals went to financial investors. The takeover appetite is greater than ever, says expert Krusch, the market is booming.
However, there are signs of a slight easing in the valuations. Frank Hermann, Managing Partner of Argos Wityu, says: “Overall, we are seeing a normalization of valuations in the market. However, there are very big differences between different industries.”
In the healthcare industry or in the technology sector, high prices would continue to be paid, often more than 15 times operating profit (Ebitda). In industry or the service sector, they would be significantly lower on average.
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The activities of financial investors in Germany have been increasing for years. The reasons include more and more and above all larger funds, which collect sums in the tens of billions at the top. Because the yields are higher than for bonds and equities, the trend will continue because institutional investors are still under pressure to invest.
The boom also remains intact with exits for the time being, in 2021 112 investments were sold or listed on the stock exchange, with financial investors raising a record sum of 30.3 billion euros. German IT companies were particularly frequently targeted by financial investors.
ESG issues are playing an increasingly important role in corporate transactions, the abbreviation ESG stands for environment, social issues and good corporate governance. “In general, investment opportunities in all sectors are more critically scrutinized as part of due diligence with regard to their ESG footprint.
Secondly, there is an increased interest in companies that can particularly benefit from the trend towards more sustainability as part of a realignment, says the head of Accenture Strategy, Moritz Hagenmüller. And thirdly, a lot of capital flows into business models that make sustainable management easier – the variety is enormous and ranges from recycling companies to technology providers.
More: EQT goes on a company hunt with a mega fund