PARTNER CONTENT
At the end of the dotcom bust in early 2003, I started working for a German bank to help them develop their institutional equity brokerage. The obvious place to start was, naturally, Germany. And so, I and colleagues spent weeks driving around its industrial heartland meeting many of the largely forgotten, at the time at least, listed German Mittelstand companies.
Coming off the adrenalin fuelled technology bubble, this was gritty stuff. Endless factory tours and industrial strength coffee in bland suburban offices. A long way from the marbled foyers of Canary Wharf where I worked through the tech boom. What we found, however, was more valuable than we might have otherwise thought. Good solid businesses with high margins, often with global leadership in machinery, components, specialty chemicals and all the things everyone, in financial markets at least, was calling the “old economy”.
In 1999, owning a profitable, cash-generative business with real customers and noisy factories was taken as evidence that you simply didn’t get it. The money, the talent and the business journals had all migrated to the dotcoms, where eyeballs mattered more than earnings and adding “.com” to your company’s name could multiply its valuation. Barron’s ran a cover that year wondering aloud whether Warren Buffett had lost his touch for refusing to join in. Value investing was pronounced dead.
Then, in March 2000, the bubble broke. By the autumn of 2002 the Nasdaq had fallen by close to 80% from its peak and the dull, dependable businesses everyone had abandoned were suddenly the only place serious capital wanted to be. The businesses hadn’t changed. Their cash flows were the same in 2002 as in 1999. What changed was fashion and the investors who had quietly stayed in the unglamorous corner of the market while everyone else chased the future were rewarded for it.
This was especially the case in the German Mittelstand, where international investors progressively woke up to the quality and value on offer. I saw it first-hand. The more we drove institutional clients to Tüebingen, Herzogenaurach, Landsberg am Lech, Wiesbaden and all those provincial German towns, each with a local business champion, the faster the re-rating, in value terms, of the German Mittelstand.
Something with the same shape might be taking form today. Capital, talent and attention are pouring into artificial intelligence with a fervour that would have been familiar to anyone investing in 1999. And once again, an entire asset class of “boring”, cash-generative businesses are going almost unnoticed.
This time I’ve been looking at the private Mittelstand where, as well as the valuation case we saw back in 2002, there is a potentially more powerful dynamic – businesses are for sale and the sellers are motivated.
Germany built one of the world’s most resilient economies on hundreds of thousands of small, family-owned firms scattered across every region and trade. The Mittelstand accounts for 99.3% of German companies , roughly nine in ten of them family-run, and together they employ more than half the country’s 45-million-strong workforce. They are not marginal assets. They are the connective tissue of a €6tn economy.
That foundation is now passing through a generational transition unlike anything in its history – and, as in 2002, the opportunity is sitting precisely where current fashion is not.
An entire cohort of owner-founders is reaching retirement at once, while the pool of younger entrepreneurs who might replace them keeps shrinking. In 2003, owners under 40 made up 28% of the Mittelstand; by 2025 that share had fallen to 13%. Over the same period, the over-60s climbed from 12% to 36% . This is structural and the resulting succession gap will widen long before it narrows.
The scale of opportunity is striking. KfW (the state-owned German development bank) estimates that around 186,000 owners plan to step down by the end of 2026 and are actively seeking a successor. Looking out to 2029, the pipeline swells to roughly 545,000 potential successions — about 109,000 a year. These are, overwhelmingly, profitable enterprises with loyal customers and skilled workforces. What they lack is not commercial viability. It is a next owner.
What does this mean for potential buyers?
There’s an obvious hurdle when buying a family business which is information asymmetry. Succession deals with unfamiliar counterparties demand more time, deeper diligence and more careful structuring than investing in the public markets. But that hurdle is also the moat. It thins the field of competitors and keeps entry pricing attractive if you understand, and can connect with, the culture of the company you’re buying.
Although that cultural challenge is difficult to overcome, there’s now an opportunity that mitigates that risk. My experience through the dotcom boom and bust, followed by my drives around industrial Germany, was one of the most educational times of my professional career. If I reflect on that today, the smartest move is not to choose between AI and any other opportunity, private Mittelstand included, it is to apply one to the other.
Many Mittelstand firms sit on years of data they have never properly interrogated; practical AI in demand forecasting, dynamic pricing and operational efficiency, just for starters, will yield great value for acquirers in a way the emergence of the internet and mobile telephony did for listed Mittelstand investors the last time round.
The private Mittelstand opportunity does not depend on any bubble bursting. It is generational in scale and structurally driven regardless of the tech cycle. Fashion, as 2002 showed, eventually rotates back to substance, and the returns accrue to whoever was already there when it did.
Andrew McNally, Co-Founder, Sapius Capital Limited
