An increasing number of private debt fund managers are looking to Germany for opportunities. The likes of Valin Funds, Ardian and Idinvest have all recently told PDI the German market is particularly attractive, despite the significant historical presence of banks.
Liquidity in the German banking system is deep, Mark Brenke, co-head of private debt at Ardian, tells PDI. This, coupled with the number of banks in the country, means small and mid-sized businesses have more options when it comes to seeking financing.
“All else being equal, there are more sources of financing,” says Brenke.
In addition, unlike other major European markets, Germany isn’t defined by one major financial centre.
“You don’t have London or Paris; one city in Germany that is the hub of all financial activity,” Brenke adds.
The country also has a less-developed private equity space than comparable European economies, adds Eric Gallerne, partner at Idinvest.
However, while these dynamics make breaking into the market difficult, Germany is proving increasingly attractive for private debt funds, whether it be Solvency II pushing investors into their arms, new regulations aiding non-bank lenders or simply the country’s Mittelstand looking for investment. Historically low interest rates have also bolstered the case for higher-yielding alternatives to traditional fixed income.
“The German market does have a large number of attractive companies to finance and invest in,” says Brenke. Smaller businesses, those with EBITDA below €20 million, are also open to non-bank financing due to greater levels of flexibility, Gallerne adds.
His firm recently opened an office in Frankfurt, adding native German speakers to its team there. German-speaking staff, knowledge of the local landscape and proximity to businesses are all critical to succeeding in the market, he says.
“There are cultural differences,” says Gallerne. “It is something that you can’t address with a non-domestic office.”
Smaller business owners in Germany are also more comfortable talking to lenders in German than communicating in another language with firms located overseas, he adds.
Flexibility is also key when it comes to taking on the banks. “The ability to do subordinated debt is important,” says Brenke. Senior debt is often provided by banks, benefitting from greater pricing power than the funds have.
If funds are going to dip into lower-rated debt, they also have to find limited partners with an appetite that matches such investments.
“You need an investor base that is comfortable with a broader mandate,” says Brenke.
Recent developments have helped make the German market more attractive for private debt managers. Amendments to investment guidelines and the introduction of Solvency II have steered insurance and pension companies increasingly towards the asset class, Nicolaus Loos, who heads Valin Funds, recently told PDI.
Last year, the German financial regulator also said that non-bank lenders don’t need a banking licence to finance businesses. Additionally, while the German banking industry isn’t changing rapidly, it is becoming more consolidated, Brenke notes: “It’s not becoming more fragmented.”