FIN A N CE - Deutsche Beteiligungs AG

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out opportunities, support management in implementing its ideas, but they do not force the management teams to do anything. They turn previous managers into entrepreneurs. However, the managers may act like entrepreneurs, but they are no true entrepreneurs, because the majority shareholder is usually the private-equity company. The management teams are still accountable to their shareholders. Apparently this is not a problem, because financial sponsors tolerate mistakes as long as they feel fully informed and have a relationship of trust with their management teams 18 “A good manager is not influenced by the fact that his own money is at risk”. But, if the cooperation proves not to be fruitful, financial sponsors prefer to replace the existing management team instead of forcing it to comply with their preferred strategy. In this respect they do not differ from other shareholders who do not see themselves as partners of the management team. Once both parties have reached a good cooperation level and established a relationship of trust, the management teams have the full backing of their financial sponsors. In addition, the managers are shareholders themselves and benefit from the company’s increase in value. Because there are certain incentive packages (“sweet equity”), their return is often higher than that of the financial sponsor. Against this background it is not surprising that working under a private-equity company was conceived as very positive by all interviewees, even if some had minor complaints. But the image of private equity in the general public is a different one. What are the reasons? Private equity does not only stand for freedom, but also for a strong performance orientation. Many of the interviewed companies went through reforms which basically had two objectives: a clear individual accountability for results at all management levels and the highest possible degree of transparency. Only managers with a good track record benefit from this transparency, because weaknesses are revealed rigorously. In large corporations or family businesses this performance control is usually less strict. When a financial sponsor invests in a company there are often employees who do not accept the increased performance expectations of their new employer. Some of them publicly criticize private equity. In addition, this performance control is applied to everyone in the company, but only a small circle of managers receives a financial incentive or holds shares itself. “Thanks to the cooperation with our financial sponsor the overall quality of the management team has improved.” Another reason is the poor transparency of these companies for third parties. While financial sponsors very quickly create internal transparency, outsiders very rarely find out what they have done inside the company. Many people are suspicious of the high returns generated by private-equity companies. This leads to mistrust and stereotypes, which were for the greatest part FINANCE Studies | Private Equity in Mittelstand Companies
not confirmed by the interviewees. Most managers do not feel any pressure to cut costs or design cost-cutting programs. There were only few cases with personnel lay-offs. The interviewees clearly contradicted the existing stereotype that financial sponsors achieve their returns primarily by means of financial engineering. Financial sponsors are much more appreciated by their management teams than by the general public. This is not surprising. But it is interesting to note that this can not be attributed to the high financial incentive for management teams during a buyout, but rather to the extensive entrepreneurial freedom and newly gained opportunities to make more of a company than in the past. Activating unused growth potential seems to be the most important leverage for added value for Mittelstand portfolio companies – and not the elimination of unnecessary costs. It is remarkable that financial sponsors and their portfolio companies hardly need additional funding: With an identical capex, significantly higher growth rates are suddenly generated and free cash flow is used to acquire other companies, which results in higher profits and a reduction of the debt/operating profit ratio. The methods of private equity companies are simple and less sophisticated than often claimed. The often restrain themselves to a consequent exploitation of growth potential by freeing the company and the management from unnecessary burdens. The fact that financial sponsors additionally burden management teams with sometimes very high reporting requirements is part of the negative consequences of a FINANCE Studies | Private Equity in Mittelstand Companies buy-out. The managers feel that these weigh fairly little compared to the liberating effects. The management teams have a very professional attitude. They know that their investors will judge them in the end by how they have improved the company’s performance and have thereby added value to the company. Increasing a company’s valuation remains the overall objective of financial sponsors. 19
Page 1 and 2: FINANCE Studies Private Equity in M
Page 3 and 4: Content I Executive summary 4 II Th
Page 5 and 6: Cooperation between management team
Page 7 and 8: II Study results 1. The interviewee
Page 9 and 10: Shareholders before the buy-out Ent
Page 11 and 12: What type of support from your fina
Page 13 and 14: Three entrepreneurs welcome the fac
Page 15 and 16: Would the changes have been impleme
Page 17: They are constantly screening M&A m
Page 21 and 22: Date of the Date of Secondary Previ

FIN A N CE - Deutsche Beteiligungs AG

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