As private equity (PE) becomes more pivotal in the funding landscape for later-stage startups, we've decided to broaden our focus beyond venture capital (VC) to bring you insights from the latest Preqin report on Private Capital in the DACH region. This publication offers a comprehensive look at the evolving role of private equity in Germany, Austria, and Switzerland, and sheds light on the significant growth and opportunities in this sector.
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Remarkable Growth in Private Capital
Over the past five years, DACH-based fund managers have seen their assets under management (AUM) soar by more than 140%, reaching €238 billion. This remarkable growth underscores the rising prominence of private capital in the region. The number of active General Partners (GPs) has doubled since 2018, now exceeding 2,000, signaling a vibrant and expanding market.
However, despite this impressive growth, DACH still lags behind its European peers, particularly the UK. While private equity AUM in the UK accounts for 18% of GDP, Germany's stands at a mere 1.8%. This disparity highlights the untapped potential within the DACH region, particularly in Germany's Mittelstand – the small and medium-sized enterprises (SMEs) that form the backbone of its economy
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The Mittelstand: Key to Closing the Gap
Germany's Mittelstand is crucial for the region to catch up with its economic rivals. These mid-market organizations, with up to 250 employees and annual turnovers of no more than €50 million, are the beating heart of the German economy. The greatest opportunities lie in mid-market and buyout deals ranging from €100 million to €500 million.
Deutsche Beteiligungs AG, a specialist in mid-sized company buyouts, reported an average annual growth rate of 7% in the buyout market within the Mittelstand. This increase indicates a growing willingness among founders and business owners to embrace private equity as a strategic partner.
Surge in Family Offices and Private Equity Managers
One of the standout trends in the DACH region is the significant rise in family offices, which have increased by over 140% since 2018. This surge reflects a broader trend of private wealth becoming more active in private capital investments. Germany, in particular, has seen a nearly 70% increase in private capital investors during the same period.
Moreover, the number of active private equity managers has grown by 90%, and venture capital managers have doubled. This expansion is driven by a favorable investment climate and the increasing recognition of the potential within the DACH region.
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Notable Investments and Market Confidence
In September 2023, Blackstone, a leading global investment firm, opened its third office in Germany, demonstrating confidence in the region's potential. Blackstone has deployed €17 billion in Germany, investing in renowned brands such as Leica, Scout24, and Armacell. This move highlights the country's skilled workforce, entrepreneurial spirit, and robust fundamentals, making it an attractive destination for private equity.
Challenges and Economic Outlook
Despite these positive developments, the DACH region faces several challenges. Germany, in particular, has been grappling with economic headwinds, including fears of recession, an aging population, and the impact of the Ukraine-Russia conflict on natural gas prices. These factors have contributed to a cautious sentiment among SMEs, as reflected in KfW Research's SME Barometer, which has shown consecutive declines in sentiment.
Austria and Switzerland are also navigating their own economic challenges. Austria's heavy reliance on exports to Germany makes it vulnerable to economic fluctuations, while Switzerland's banking sector, despite its strength, faces scrutiny and potential instability, as seen with the near-collapse of Credit Suisse.
The Path Forward
For the DACH region to fully capitalize on its private equity potential, it must continue to foster an environment conducive to investment and innovation. This includes addressing structural challenges, promoting entrepreneurship, and leveraging the strengths of its Mittelstand.
Germany, in particular, is expected to see renewed growth in 2024, driven by wage increases, steady employment levels, and falling inflation. This positive outlook provides a solid foundation for continued private equity investment in the region's dynamic mid-market sector.
In conclusion, the DACH region is a sleeping giant awakening to its potential in the private equity landscape. With sustained growth, increased investor activity, and a focus on mid-market opportunities, the region is well-positioned to become a significant player in Europe's private capital market.
This blog post was written with the assistance of AI, ensuring a detailed and insightful analysis of the Prequin Private Capital in DACH 2023 report.
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The Author
This log post was written by Jörn “Joe” Menninger, startup scout, founder, and host of Startuprad.io.
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