German leveraged buyouts: Banks fight back

The bad times are in the rear-view mirror as far as participants in the German mid-cap leveraged buyout market are concerned. Last year represented the best 12-month period post-Lehman with 77 deals worth between €20 million and €500 million completed – representing a 10 percent increase on 2015.

The survey was conducted by GCA Altium, the European division of global investment bank GCA, by way of its MidCapMonitor. It found that “new finance” primary LBO deals rose from 43 percent in 2015 to 55 percent last year, while recaps and re-financings fell from 48 percent to 35 percent over the same period. Add-on financings declined from 13 percent to 10 percent.

The year also saw private equity firms prioritising portfolio sales over paying dividends.

“Although payment of a dividend is very attractive, at some stage private equity funds also need to realise sales proceeds,” says Norbert Schmitz, managing director in GCA Altium’s Frankfurt office. “This came much more strongly to the fore in the second half of 2016 than in the prior periods.”

On the banking side, the survey identified SEB as market leader, with an involvement in 20 transactions (up from six the previous year); former table-topper Commerzbank came second, with 15 deals; followed by DZ Bank and Unicredit in joint-third place, with 12. The banks provided new LBO finance to the likes of pharmaceuticals firm ZytoService, wire solutions manufacturer Drahtzug Stein and cybersecurity specialist Ultimaco.

But while the banks were toasting a prolific year, debt funds were left mulling a less enjoyable experience as they saw their market share decline from 26 percent in 2015 to 18 percent last year.

GCA Altium research indicated that this was because banks were adapting to debt fund competition – both by reducing the cost of finance and also offering more flexibility around ‘softer’ factors, such as covenants and other credit terms in loan agreements. 

However, by the end of the year, the debt funds were seeing some light at the end of the tunnel. “In the second half of 2016, debt funds were nevertheless able to stabilise their market share and actually increase it again slightly,” says Johannes Schmittat, another managing director in GCA Altium’s Frankfurt office.

When it came to unitranche financing, the survey found it was relatively out of favour in Germany compared with the rest of Europe. German unitranche deals dropped from 16 in 2015 to 12 last year, while unitranche deals in Europe as a whole increased from 92 to 102 over the same period, with the UK accounting for 41 and France 25.

GCA offers services around M&A, debt, public and private finance and restructuring matters. Its MidCapMonitor is designed to boost the transparency of the German mid-cap LBO market.