Leaders League. How would you describe the German private equity environment at the moment and, indeed, the approach and culture of a typical German PE firm?

Volker Hichert. There are no local teams in Germany catering for the mega buyout market. Instead, they are all local offices of international companies. As a result, German PE teams are all mid-market or small-cap teams. Deutsche Private Equity, a €1 billion fund with an AUM of €2 billion, is already among the top three teams in terms of size. This makes for a very mid-market-friendly approach. The teams are very culture-minded and the better ones realize that German owners and entrepreneurs are a specific breed of people with very different attitudes when compared to their Anglo-American counterparts. It is important to harness the tools of trade that the international market has developed without placing too much emphasis on the technical side of our business. Opportunities more often than not depend on a successful buildup of trust between vendor and PE house.

What would you say have been your firm’s biggest achievements in the last twelve months? 

Once again, we have been one of the most active investors in Germany: We did 21 deals in 2019: three entries, 16 add-ons and two exits. On top of that we significantly expanded our team in order to gear up for the full AIFM [Alternative Investment Fund Manager] license and the 2020 fundraise, both of which we achieved. We continue to be a very dynamic growth company attracting very successful and hugely capable people – and that is undoubtedly the core of our companies’ successful future. On the sourcing front, 2019 saw us increasing deal volume to more than 700 a year, which was the basis for the investment success we have enjoyed.

What are the biggest challenges the coronavirus crisis has thrown at private equity and how well has the industry in Germany been able to weather the storm? 

There has undoubtedly been a significant reduction in M&A activity, most pronounced in Q2 but also spilling over in Q3. Having said that, we have seen a significant revitalization of activity lately, and our deal flow has come back to pre-coronavirus levels. We have already signed two platform and three add-on transactions in Q3 so far, and are actively working on a multiple of additional opportunities. On top of the activity issue, we do see a problem in communication. Ultimately, PE is a trust business and it is very hard to meet people and develop a relationship via telephone or videoconference. Therefore, all curbs on physical meetings as well as on travel are substantially detrimental to our dealmaking. The third factor is the transformational push facing a number of industries we are actively involved in. Digitalization is picking up pace, and traditional ways of customer interaction have suffered and will change. We believe, however, that as alert and nimble owners – especially when compared to big conglomerates – we are in a good position to exploit these trends in our favor and thus capture market share.

Has the coronavirus crisis had much of an impact your firm’s organization specifically?

Fortunately, our portfolio companies are performing well; there’s no need for troubleshooting. Nevertheless, we are monitoring the markets of our portfolio companies even more closely than before, so we can detect and react to negative effects at an early stage. We do expect a shift from larger to smaller deals. That means we will probably do more add-on deals, as opposed to investing in businesses that can act as nuclei. For us, it is important to get the message out there that we are still looking for good investments. It helps that our portfolio companies are performing well. This means we can put a lot of focus on new deals. In the due diligence process, we evaluate the possible impact of Covid-19 on a business model. We’ve always looked at how resilient businesses are to different types of crises, such as trading wars or recessions, but the intensity of our scrutiny has certainly reached a new level.

What do you see this changing or transforming after the crisis? How will it affect private equity long-term, if at all?

In principle, we do not expect any fundamental changes in the PE market. Some players will leave the market, others will come. We do not expect  a change in the underlying growth pattern of the German PE market. In terms of our competitive position, we hope that our customers, our investors, realize that our strictly growth-focused model outperforms the leverage-based returns of many more traditional PE companies in times of crisis. We always claim that our three times gross is better than a leveraged three times gross fund because our downside is much more limited. Our recent fundraising had a hugely successful first and final close at the hard cap of €1 billion, which seems to indicate that our investors have bought into that logic.

The virus aside, what will the private equity landscape look like in three years?

It will look much the same as before, I would have thought, except for a lot more technology being part of all interesting business models. Tech is not merely an industry anymore and canno longer be compartmentalized as such – it is an issue of competitiveness in all industries.

Have the European Central Bank [ECB] plan and national rescue plan had any impact on the companies in your?

We have one portfolio company which has applied to and been granted a credit facility from [German state-owned development bank] KfW. That was a precautionary measure, not a necessity. The ECB plan has so far had no impact on our businesses and we do not expect it to be of immediate operative relevance anytime soon.