2016 was a new post-Lehman record year for the German mid-cap LBO market, according to the latest MidCapMonitor survey by Altium, which lists 77 transactions for the year, representing a further 10 per cent rise on 2015.
The survey regularly analyses leveraged buyout finance transactions with a credit volume of between EUR20 million and EUR500 million.
The proportion of new finance transactions, i.e. primary LBO deals, was 55 per cent in 2016, up significantly on the 43 per cent seen in 2015. While recaps and refinancings accounted for 48 per cent of transactions in the first half of 2016, they fell to just 35 per cent for the whole year.
At 10 per cent of transactions, add-on financing, i.e. the acquisition of additional parts of a business, was slightly below the previous year (13 per cent) on a full-year basis.
Overall, private equity firms thus chose more frequently to sell a portfolio company, especially in the second half of 2016, and opted less often to pay a dividend.
"Although payment of a dividend is very attractive, at some stage private equity funds also need to realise sales proceeds. This came much more strongly to the fore in the second half of 2016 than in the prior periods," says Norbert Schmitz, managing director of the Frankfurt office of GCA Altium.
2016 also saw an increasing number of acquisitions by strategic investors, such as GE buying Concept Laser, Tesla buying Grohmann, RCP Group buying ESE, the Signa Group buying Internetstores and Liaoning Dare Industrial buying Carcoustics.
On the banking side, SEB and its relatively small team handled 20 transactions last year (previous year: six transactions), replacing Commerzbank as market leader. Second place was taken by Commerzbank (15 transactions), with DZ Bank and Unicredit in joint third spot (with 12 transactions each).
During the last quarter of 2016, banks provided new LBO finance for companies such as ZytoService, Drahtzug Stein, think project!, Schock, SLV, Utimaco, GEV, Cherry, Onlineprinters and Aposan. Recaps and refinancings were conducted at Koller, ATOS Kliniken, HSE24 and Puraglobe, among others.
As forecast by GCA Altium at the end of 2015, the share of the German LBO market accounted for by debt funds declined, falling from 26 per cent in the full year 2015 to just 18 per cent in 2016. Analysis by GCA Altium indicates that this is mainly due to the banks continuing to adapt their structures in response to competition from debt funds. In addition to a reduction in the cost of bank finance, which fell in the second half of 2016 in particular, banks now offer considerably more flexibility around "softer" factors such as covenants and other credit terms in loan agreements. This significantly erodes one of the key advantages enjoyed by debt funds.
"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, managing director at the Frankfurt office of GCA Altium. Debt funds accounted for 15 per cent of the market in the first half of the year, and 18 per cent over the whole year.
Unlike Germany, which posted a fall from 16 (2015) to 12 (2016) transactions, the wider European market for unitranche finance provided by debt funds continued to grow significantly, with 102 transactions (2016) compared to 92 transactions in the previous year. However, growth is slowing somewhat (2014: 63 transactions). The biggest market for debt funds remains the UK, with 41 transactions in 2016, followed by France with 25 transactions.
