Private Equity in Germany

source: valuewalk.com

If you’re aiming for private equity in Germany, the good news is. Germany is one of the top markets for private equity and venture capital. The German private equity market hosts the second biggest number of fund managers in Europe, after the UK.

To private equity investors, German-based companies, industries, and corporations are proved attractive. German-based industries and organizations thus attracted the second-largest amount of capital in Europe for both venture capital & buyout deals in the first half of 2016.

From Preqin’s special report, we can extract the key trends of the private equity market in Germany –

• In the first half of 2016, eight private equity funds (Germany-focused) raised around 1.8 billion Euros, the highest level of capital raised in a single year since the GFC (Global Finance Crisis).
• The largest Germany-focused fund was the EIF Growth Facility, which closed in the first half of 2016 and was managed by the European Investment Fund, whose aim is to invest in venture capital.
• Currently, Germany-focused funds are around 4% of total Europe-focused funds – in terms of total target capital and the number of funds raised.
• In 2014, Germany-based private equity funds closed 132 buyout deals worth 13.4 billion Euros. In 2015, the number of deals and value reduced; but in 2016, the private equity market bounced back by closing 69 deals worth 5 billion Euros only in the first half.
• It has been seen in the report that Private equity in Germany has closed the third-highest number of buyout deals since 2007. The first & second positions are held by the UK and France, respectively.

As you can understand, German private equity firms offer a varied range of services to their esteemed clients. Here’s a brief of their most significant services offered –

Support in the investment process:

Most private equity firms offer support services to facilitate the whole investment process through –

• Due Diligence: Finding out the facts and detailed account of what is of utmost significance to the success of an investment process. It can be in finance or tax, in law or commerce – due diligence is the sole function that helps clients leap.
• Tax structuring: Tax structuring is an essential component of the investment process. Private equity firms in Germany take care of the same as well.
• M&A Advisory: Mergers and Acquisitions have so many facets, and if the firms don't suggest the right way to execute buy-side deals, clients may make mistakes in putting things together in the most accurate way.

Advisory on the development of portfolio companies:

Before portfolio companies can ever expand, they need advice on the following things –

• Financial Statement Auditing: Without looking through the financial statements and ensuring accuracy, it’s impossible to expand upon the business. At the same time, private equity firms advise the companies on financial statement auditing in congruence with the German Commercial Code (IFRS).
• International Business Report (IBR): Germany's private equity also advises companies on financial restructuring, restructuring reports, and budgeting.
• Financing structure optimization: Germany's private equity also provides advisory in financing structure optimization/balance sheet structure optimization.
• Taxes & Accounting: Before portfolio companies can develop, they need the basics ready. For that, they receive advice from private equity firms on maintaining their accounting and paying their taxes.

Divestment Phase Support:

Private equity in Germany also provides support in the divestment phase.

• M&A Advice: One of the major advisories in the divestment phase is M&A Advisory, provided by top-notch private equity firms in Germany.
• Vendor Due Diligence: It’s essential to find out whether the vendors are capable of providing support or not.

There are many top-notch private equity firms in Germany. According to a survey done by Preqin, five private equity firms hold the top-most positions in terms of total capital raised over the last ten years. These five private equity firms alone have raised over 37% of the total capital raised over the last ten years.

Let’s have a look at them one by one –

• Triton: Triton’s main emphasis is on medium-sized firms in Belgium, Austria, Denmark, Finland, and Germany. It has combined sales of 13.9 billion Euros and is focused on buyouts and growth investments in Europe.
• Deutsche Beteiligungs AG: This is one of the oldest private equity firms in Germany, founded in the year 1965. It serves its huge clientele and specializes in buyouts and growth investments. The capital administered and advised by the DBAG group is around 1.8 billion Euros.
• Quadriga Capital: Quadriga Capital not only emphasizes German-speaking countries but also invests in Russia. A deal currently in the talks is approximately 500-550 million Euros approximately.
• Odewald & Compagnie: This is one of the top-notch private equity firms in terms of total capital raised in the last ten years. This firm was founded in 1996. Since 1997, Odewald & Compagnie has invested over 1 billion Euros in SMEs in the German-speaking regions.
• Caption: This private equity firm mainly focuses on buyouts, emphasizing the promotional products & services industry. This firm was founded in the 1980s, and since then, it has had a fund volume of over 1.1 billion Euros.

The recruitment process of private equity in Germany is just like in the UK and Europe. Let’s have a look at the recruitment process of the private equity market in Germany –

• Psychometric Tests: The first filter of tests the candidates need to go through is psychometric tests. Almost 30-50% of candidates are trimmed through these tests, and only the remaining are allowed for the next round.
• Fit interview: You need to prepare well for the fit interview. During this interview, you will be asked to walk through your CV. You would also be asked to answer a few basic questions like – "Why private equity?" "Why do you want to join our firm?" "Tell me something about you," etc. These questions seem easy to answer, but fit interviews will reject many candidates. Thus, it would be best if you practiced the answers to these questions a lot to answer well.
• Mini-case analysis: Often, if you go through a fit interview, your next test would be a presentation on a mini-case. Through mini-cases private equity firms would like to understand your business acumen. You would be asked simple questions like – "Do you think the airline is a good investment?" or, "In the last ten years, was real estate a good investment? Why? Why not?" etc. Or else, you may be asked to do a SWOT analysis of a firm, or they may give you a SWOT and ask you questions.
• Technical round: Once you’re through, you must go through a technical round. Usually, this round is easy for those who have experience in LBO, IRR, and other finance/modeling questions.
• Next rounds: Most of the candidates are rejected at this level. Only a selected few are shortlisted in the last two rounds. First, you will have to present a case on LBO modeling. It will not cut it if you don’t know LBO modeling or have a basic idea. It will not cut. You need to know LBO in detail to solve the case, analyze, and present the case on your findings. Before the interview, prepare LBO modeling from scratch. If you go through this round, you need to go through the last round called the “likeability test.” In this test, the setting would be informal. And you may be invited to a dinner with the CEO and senior partners. And they can ask you anything. This round is implemented for two basic reasons – first, the firm needs to know whether you’re a perfect fit for the firm in the long run; and second, this round will let senior partners and other members of the firm talk to you and find out whether you’re a good fit or not. In this round, you may be asked many personal questions as well. Be flexible and hold your nerve. This round is not only a fitment round; it’s also a personality-test round. So be yourself and express your best.

In Germany's private equity, working hours are similar to the UK or European private equity market. People work long hours, and there is huge pressure to bring in better investments.

However, the working hours as a private equity analyst are lesser than working hours in investment banking in Germany. You would be working around 60-70 hours on average, but the working hours depend greatly on the private equity firms you’re working for. You will maintain a good work-life balance, but if you work for a bulge-bracket firm, you may need to work more hours per week.

Usually, private equity firms work in a small team, and as a result, you can walk into anybody and ask questions. You also need to do a bunch of tasks that have nothing to do with analyzing investments – like making cold calls to prospects, looking over investments that are already being bought and seeing their status as of now, and so on and so.

In Private Equity in Germany, compensation is quite good. But compared to other finance roles, it’s not great (at entry-level).

As per Robert Walters, in 2015, the average compensation of private equity professionals who had 3 to 7 years of experience was 55,000 – 75,000 Euros per annum. In 2016, the figure increased, and it became around 65,000 – 80,000 Euros per annum.

But it can be seen that if you can stick to private equity for more years (at least 10+), your compensation would be much more. In 2015, the salary of private equity professionals with 7 to 15+ years of experience was 90,000 to 160,000 Euros per annum. In 2016, the salary range for 7 to 15+ years of experience increased from 90,000 to 180,000 Euros per annum.

If we compare the compensation of private equity professionals with other finance positions, we would see that in the beginning, private equity professionals earn less. Still, as years go by and experience increases, private equity professionals earn more than other finance positions.

source: statista.com

Statista did a study, and they found that in the year 2017, the compensation of private equity investment managers in Germany having 3 to 7 years of experience was 75,000 to 100,000 Euros per annum. And for over seven years of experience, the compensation increased from 90,000 to 180,000 Euros per annum.

Private equity professionals usually quit for better opportunities and explore other career options.

Private equity professionals usually go for investment banking or venture capital since both of these careers (investment banking & venture capital) provide ample opportunities in Germany. But few also go for equity research profiles.

If you want to exit from a private equity career, first be clear about why you would like to quit and change your career. Suppose you know "why," you will easily find out "how."

This article has been a guide to Private Equity in Germany, services offered, recruitment process, culture, top private equity firms in Germany, salaries. You may also have a look at the following article for learning more about Private Equity –

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