Private Equity provides a means by which large financial institutions such as banks, insurance companies and pension funds can efficiently invest in private businesses of all sizes. Private Equity fund managers must have highly specialised skills and extensive experience to be successful.

In 2006, according to the European Venture Capital Association, private equity funds invested €3.5 billion in 969 German businesses. It is a powerful and flexible source of risk capital which, together with appropriate financing, helps businesses to grow. Private Equity is increasingly helping mid-sized German companies, their shareholders and employees.

Why should an owner of a successful family business consider selling to private equity?

 
There are many reasons including retirement, health and a change in life style. Alternatively, the business requires further resources to continue its growth path that the founder cannot provide. Whatever the reason, the process can be difficult. Who should buy? One obvious buyer is a competitor – but what if he does not respect the confidentiality of the information he will need before he makes an offer – perhaps his interest in buying is mainly to gather information to improve his position? Another potential buyer is a large and diversified company – but will the business be reduced in size or relocated for strategic reasons? The owner always cares what happens to the business he has built even when he is no longer the owner. A private equity buyer must focus on building on the success of the past and help to grow the business. The existing management team is important as the investors do not have the detailed operational experience. Private equity buyers can be more flexible meeting the wishes of the vendor by, for example, retaining the vendor as a minority shareholder and non-executive advisor and maintaining the company`s independence.

• Examples: Westfalia, Alukon, Amann and Nobis in Investments
  

Why would a big company decide to sell a non-core subsidiary to private equity?

Private equity can often offer the optimum combination of several factors including the best price, speed and certainty of transaction, provide a more confidential service and satisfy the requirements of management. There is increasing pressure on big companies to focus on what they do best and dispose of other activities. Here there is often the special problem that the subsidiary is not really independent of the parent. Accounting, human resources, and marketing skills are often shared. There is a need to “carve out” a business, cut the umbilical cord and immediately provide the management team with the resources they need. Private equity firms can do this. Moreover such business can grow rapidly away from their parent with the right help.

• Examples: Berkenhoff, Amoena and Spheros in Investments.

Why should a well-managed business with good products and markets want to use private equity?

Ambitious growth or acquisitions require funding. Private equity can provide the money certainly but often more is required - experience, professionalism, strategic thinking and international contacts, which from the right private equity partner can help the business to grow.

Can management and private equity be partners?

Good businesses must have a good management. A good manager has a vision of the future, knows his business intimately and believes he can really make it better if he gets the chance and the support. Private equity investments are dependent on good management. This simple fact is recognised by offering key management a share in the business they run. When the company is sold, management will share the capital gain with the private equity investor. Increasingly senior managers in Germany are becoming aware of the potential opportunity to buy their business. Private equity makes this possible.

• Example: Nobis in Investments.

Why do private equity firms invest?

It should be noted that private equity firms are interested in returns for their investors. Returns mean a realisation of their investment though a sale or IPO – usually within seven years. The original capital is returned to the investors with a good return. This is why banks, institutional companies and pension funds use private equity to diversify their investment portfolio.

How should you choose a private equity firm?

Making a choice is not easy without a personal meeting. A web site or brochure gives the broad parameters of investment size and type, but little more. Call a few - everyone is keen to make new investments and will be happy to provide information.  Meet them. Ask to talk to the CEOs of portfolio companies past and present to find out about their experience before making a final decision. Partnerships can last for many years and mistakes are not easy to put right.