High prices and higher expectations

Pricing of PE-backed buy-outs in the DACH region has been increasing across the last four quarters. Clearwater International’s Axel Oltmann speaks to Unquote about pricing and the pricing expectations in the region.

“In general, I think the market is still in very good shape,” says Oltmann. “We see a number of companies that are developing very well, increasing profits and accelerating their growth.”

Private equity firms have been quick to take advantage of this of course, but they are not the only interested parties. “On good assets we see a lot of appetite from PE, then to a lesser extent family offices, and to an even lesser extent in absolute numbers from strategic buyers. However, for the assets they are interested in they will often outcompete the funds.”

It’s not just hot competition that is driving up the prices though: a combination of macro factors -including low interest rates, globalisation and digitalisation trends, and the impact of industry 4.0 concepts -lead investors from all over the world to look for assets in German-speaking Europe. “Everyone wants to get a piece from the nice German-speaking cake,” says Oltmann.

The market is notoriously difficult for newcomers, especially in the smaller deal brackets where business owners can be reluctant to deal with investors with limited or no DACH footprint. “That is a challenge,” acknowledges Oltmann, “However, as an advisor you are also happy to have new kids on the block and new candidates which you can add to situations. In the end it comes back to the question ‘what is their differentiation factor?’”

Managing expectations

Despite the strong macro environment and abundance of interested parties, Unquote has recently spoken to several industry sources that have reported a higher than average failure rate for deals in the DACH region, some suggesting that 30-40% of processes in the €50-250m enterprise value range do not result in a full sale. “My experience and gut feeling is that it should be a bit less, but certainly it’s more difficult the smaller the deal is,” says Oltmann.

A key issue is that everybody is aware of high multiples in the market now and hopes to take advantage. When premium technology assets in the upper mid-market can achieve multiples of up to 20x, it can be difficult to temper the expectations of smaller business owners. “We have to moderate and make it clear that ‘high performing’ and ‘ok’ or ‘normal’ assets are very different,” Oltmann explains. However, he also thinks there are measures the bidders themselves can take to increase the likelihood of a sale, “They can offer an earn-out structure, a very attractive re-investment program or even a minority stake acquisition. Private equity funds that are flexible on deal structuring have a clear advantage here.”

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