How the Mittelstand grew to accept private debt

They may still have reservations, but mid-market German companies have travelled a long way towards acceptance of Anglo Saxon financing.

“The banks used to ignore us,” reflected Daniel Heine of fund manager Patrimonium at the Germany Forum in Munich. “Then they started speaking to us and then we became partners. The same can be said for German companies. The market is moving irreversibly towards an Anglo Saxon system.”

Robert Meyer zu Starten of special situations manager Octane Capital endorsed the point: “The attitude used to be ‘if my bank won’t do it, I’m not going to do it with the Anglo Saxon world’. That has changed somewhat and decisions now are more economic rather than emotional. It changed after the financial crisis. Some companies had the chance to do big acquisitions and found that their banks were not prepared to support them.”

The barrier to successful access to the Mittelstand remains high, delegates heard. Particularly for those managers wanting to exploit the non-sponsored opportunity, there is a need to speak German, use German documentation and work hard to overcome suspicion surrounding their intentions – such as whether they are really seeking to take over the business and sell equity.

But these days private debt is viewed with a more open mind. “The landscape is now one where people are very wary of the banks,” said Dominik Hesse of investment office Cannonball Capital. “They have not been treated well over the last 10 years and owners have very long memories. It’s a matter of trust. For private debt providers, the market is potentially vast but you need to invest time and be seen as a long-term partner.”

It’s not all about reputation, however: there is also the issue of capacity. The returns offered by mid-market lending are attractive but the banks have been forced to retreat. “If you require €100-300m that’s typically too small to access the capital markets and it’s tough to get a consortium of banks together,” said Abhik Das of funds of funds manager Golding Capital Partners, “But one to three private debt funds can provide a good solution in that part of the market.”

Heine said he thought that German private debt would become larger than private equity – which sees around 200-300 deals a year – within the next five to 10 years, based on the continuing trend of bank retrenchment. However, Hesse warned that if some private debt firms adopted aggressive strategies and started to take businesses over, there would be those agitating for private debt to be more regulated.