DACH Private Equity in Times of Uncertainty

Industry TrendsEnvironmental, Social, and GovernancePortfolio Company LeadershipPrivate CapitalFinancial Services
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三月 31, 2020
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Industry TrendsEnvironmental, Social, and GovernancePortfolio Company LeadershipPrivate CapitalFinancial Services
ESG remains an ever-growing area of interest with the emergence of funds focused entirely on companies with a strong sustainability angle.


These days, optimism is a rare commodity in the private equity (PE) industry. Market volatility is causing turmoil in the industry and demands new approaches. The current global crisis caused by the COVID-19 pandemic has resulted in sobering forecasts for the PE industry for the next 12 months. Solid information is needed to handle the anticipated challenges more effectively. To that end, Russell Reynolds Associates conducted a survey of our trusted PE sources in the DACH region to understand their outlook for the industry.

Outlook 01: The near future

One PE professional’s summary says it all: “There is a tough deal environment, lots of dry powder, but also lots of uncertainty about the global economic development, particularly right now with COVID-19 spreading.” Uncertainty seems to weigh most heavily on the PE industry’s development prospects. This is confirmed by other PE experts who anticipate “a period of uncertainty until economic implications from COVID-19 are fully understood... as a result, less deal activity and more failed processes are likely in the short term.” In addition, there is a presumption that the difficult macroeconomic environment sets high barriers to investment and to an increase in capital inflows.

Not surprisingly, most of the survey participants expect an economic downturn within the next six months, which will have a significant impact on the PE industry.

The experts assume that the “industrial cycle slow-down will impact top-line growth across industries and assets may need to be held longer to materialize their investment plans. This will likely result in an environment where there will be fewer deals, and the market will be more buyer-friendly than it has been over the past few years.” So, some funds will have difficulty exiting portfolio companies with mediocre performance and certain industries will see hardly any deal flow. Even though certain healthcare sub-sectors might profit, generally, there will be higher hurdles for investment and more demand for less cyclical businesses.

Outlook 02: Attractive (and less attractive) targets

Attractive targets

Sustainable competitive advantage
Strong market position
Favourable industry trends
Strong management team
Stable, recurring cash flows


Unattractive targets

High valuation
Inconsistent cash flow
Political instability
Weak management team
High debt levels

In this context, we should take a closer look at characteristics that make target companies attractive. All respondents agreed that sustainable competitive advantages are the most important characteristic of a target company. Ninety percent of respondents indicated that a strong market position and favourable industry trends are very positive, and eighty percent of respondents favoured a strong management team, as well as stable, recurring cash flows.

On the other hand, ninety percent of survey respondents considered a high valuation unattractive, and eighty percent of respondents considered inconsistent cash flow to be unattractive. Political instability and a weak management team were considered unattractive by seventy percent and sixty percent of respondents, respectively. Only thirty percent of respondents consider high debt levels a less attractive characteristic for a target.

Outlook 3: Expanding strategies

We have observed various and evolving expansion strategies in recent years. In terms of market bracket, large funds have expanded into the mid- and small cap segment to better target the German Mittelstand. Other vehicles of interest are infrastructure and real estate, as well as minority funds or funds that offer flexible financing structures from debt to equity.

Thematically, ESG is an ever-growing area of interest, with the emergence of funds focused entirely on companies with a sustainability angle. Also, healthcare and software continue to be sectors of significant interest.

Only twenty percent of survey respondents answered “Yes” to the binary question “Is your firm thinking about raising a long-hold fund (i.e., 15+ years of duration)?” The primary challenges associated with long-hold funds include creating “ incentives for management and investment teams, as conventional carry models do not work” and lack of a “strong team with a long-term vision.”

Outlook 4: Geographic developments

GPs as well as LPs have a growing interest in having local offices. Although the DACH region has often been served from outside the region, more and more funds have established or are thinking about establishing local offices in the region to improve their market access.

Outlook 5: Competitiveness

Survey respondents rate the following qualities as essential to remaining competitive: A differentiated strategy, a strong sourcing network, speed in decision making and execution, and an early build-up of angles for a deal. Respondents deemed the following qualities to be very important: Specialization in one sector and ability to attract top-performing investment professionals. In fact, most respondents considered talent management the key to outperforming the market. Additional factors, such as mental flexibility and performing under pressure, enable a strong team to achieve success.

The qualities required to remain competitive will continue to gain importance since market conditions in the next 12 months will not be easy. Obviously, future market conditions are more difficult to predict due to COVID-19. Likely, firms with a flexible structure that allows short-term liquidity injections will have a competitive advantage.

Outlook 6: Exits

For exits that do occur in the next 12 months, secondary buyouts and trade sales would likely be the most favourable types of exit for portfolio companies. Initial public offerings are less likely due to extreme and possibly sustained market volatility.

Outlook 7: Recruitment

An evaluation of responses on predicted portfolio company recruitment over the next 12 months reveals several functional areas where we will likely see new talent. Seventy percent of survey respondents expect to hire in general management and in finance. Forty percent of respondents plan to hire group CEOs and positions in the technology function. Thirty percent of respondents plan to hire marketing and sales professionals. Only ten percent of respondents plan to hire legal professionals. Finally, the need for professionals with restructuring experience has increased in light of the current crisis.

The experts surveyed were managing partners (18%), managing directors (36%), and investment principals (45%). Their geographic focus is primarily on the DACH region (63%), followed by Western Europe (27%) and Germany only (18%). Only 9% have a broader focus covering all of Europe.

In response to the question “What is the size of your most recent flagship fund?” 27% answered less than €1 billion, 18% answered €1 billion to €2.49 billion, 18% answered €2.5 billion to €4.99 billion, and 18% answered over €5 billion.


Additional Authors

NADINE MENSDORF joined Russell Reynolds Associates' Frankfurt office as a researcher in February 2017. She is a member of the firm’s financial services practice and focuses on private equity. Prior to joining Russell Reynolds Associates, Nadine spent 3.5 years with another leading search firm as a researcher and a member of its financial services and private equity practices, concentrating on investment banking and private equity projects.