LBO funds buying into metal-processing businesses in Germany will need to get along with IG Metall.

In May, Thomas Krenz had a tough meeting to attend. The Germany chief of European LBO heavyweight Permira took a seat on a panel in Bochum, a medium-sized city in the Ruhr District, Germany's industrial heartland, to talk to an audience of 200 trade unionists and Betriebsröte, or members of workers councils at German companies. Alongside Krenz sat the workers council chief of Kiekert, the world's leading car lock system manufacturer and a former Permira portfolio company.

Prior to the face-off, in October 2006, Krenz and his colleagues had been forced to hand control of Kiekert to a group of hedge funds after a catastrophic deterioration in the company's financial performance had rendered Permira's investment in the company worthless.

At the meeting in Bochum, Krenz was challenged to explain what had gone wrong. He argued Permira had done everything in its power to help the company survive and worked hard to prevent it from going under even after the equity was written off. The Kiekert representative told a very different tale, insisting the company had been in trouble from the day Permira first invested in it in 2000. Unsurprisingly perhaps, most people in the room sided with the labour man: “It was not a friendly crowd. You've got to give Krenz credit – it took a brave man to turn up,” says someone who was present.

Permira is not the only private equity firm to have had robust confrontations with German workers. In the country that first labelled private equity professionals ‘locusts’, Betriebsröte have an important role to play in the governance of companies. Statutory co-determination rights (Mitbestimmung) give them board level representation and thus genuine influence. The councils can be particularly powerful when working closely with one of the country's powerful trade unions.

Workers councils and the trade unions supporting them often share in a deep-rooted suspicion of private equity. And as buyout activity has increased in Germany in recent years, so have trade unions stepped up their efforts to put pressure on the German government to make it more difficult for private equity firms to invest in Europe's largest economy.

One outspoken critic of the industry in Germany is Babette Fröhlich. A former investment banker specialising in mergers and acquisitions, Fröhlich is an executive at IG Metall in Frankfurt, the country's largest union with some 2.3 million members. Her focus is on private equity, and she describes her agenda as simple: to educate members on how to deal with, and if necessary defend themselves against, the prospective or existing private equity investors in the companies they work for. “Our role is to protect our members,” she says – and argues that now is very much a time when many IG Metall workers need protection.

Fröhlich cites numerous reasons why private equity has caused alarm among many members:

  • Sponsors are under “huge pressure to invest” and have therefore been willing to pay prices for assets that are “far removed from the operational realities of the underlying businesses”, she says. Companies that are having to service debt used to finance a leveraged buyout are doing it at the expense of R&D and other critical areas. “Private equity firms are taking vital cash flows out of portfolio companies and into their funds – we say that's wrong.”
  • Particularly damaging she says has been the trend towards leveraged recapitalisations. “Sponsors claim they invest for the medium to the long term, but we have seen a lot of short-term profit taking through refinancings – at the expense of the underlying businesses,” Fröhlich insists.
  • IG Metall also believes that interests between portfolio companies and private equity owners are not sufficiently aligned. “How reliable are private equity firms as responsible business owners? And who is at risk when highly leveraged companies get into financial difficulties?” More broadly, Fröhlich points to the “social and political dimensions” of rampant private equity activity in Germany, and warns of excess concentration of power in the hands of individual executives at the mega firms.
  • Fröhlich says private equity in Germany must be reigned in, and that IG Metall is determined to use the full range of measures available to the union in the context of Mitbestimmung as well as in terms of political lobbying.