Navigating Exit Strategies

Introduction:

Private equity investment in the DACH region (Germany, Austria, Switzerland) has seen significant growth over the past decade. As these investments mature, stakeholders must carefully consider their exit strategies to maximize returns and ensure the continued success of portfolio companies. In this article, we explore various exit strategies commonly employed by private equity firms in the DACH region.

Initial Public Offering (IPO):

One of the most common exit strategies for private equity-backed companies is an IPO. Going public allows the firm to sell shares to the public, providing liquidity to investors and allowing the company to access capital markets for further growth. The DACH region, particularly Germany, has a strong IPO market, with exchanges such as the Frankfurt Stock Exchange offering attractive opportunities for companies to list.

In 2018, German online furniture retailer Home24, backed by private equity firm Rocket Internet, successfully went public on the Frankfurt Stock Exchange. The IPO valued Home24 at around €750 million, providing Rocket Internet with an opportunity to exit its investment and realize substantial returns.

?Trade Sale:

Another popular exit route is a trade sale, where the portfolio company is acquired by another corporation. This could be a strategic buyer within the same industry seeking to expand its market share, or a larger conglomerate looking to diversify its portfolio. The DACH region boasts a vibrant M&A market, with many multinational corporations headquartered in Germany, Austria, or Switzerland, making it an attractive destination for trade buyers.

In 2019, private equity firm EQT Partners sold its majority stake in German energy management company Kabel Premium Pulp & Paper to strategic buyer Voith Group. The acquisition allowed Voith Group to expand its product portfolio and strengthen its position in the paper industry, while providing EQT Partners with an attractive exit opportunity.

Secondary Buyout:

Private equity firms often opt for a secondary buyout, where the portfolio company is sold to another private equity firm. This allows the selling firm to realize its investment while providing the company with a new partner to support its growth strategy. Secondary buyouts are prevalent in the DACH region, where there is a robust ecosystem of private equity players actively seeking investment opportunities.

?In 2020, private equity firm Cinven sold its majority stake in Synlab, a leading provider of medical laboratory services headquartered in Germany, to another private equity firm, Novo Holdings. The transaction valued Synlab at €5.2 billion and allowed Cinven to exit its investment while facilitating Synlab's continued growth under new ownership.

Recapitalization:

In some cases, private equity firms may choose to recapitalize the portfolio company instead of exiting entirely. This involves restructuring the company's capital structure to provide liquidity to investors while retaining ownership and control. Recapitalizations can be advantageous when the company has strong growth potential, and the investors believe that additional investment will generate higher returns in the future.

In 2017, private equity firm Permira conducted a recapitalization of German payment processing company GlobalCollect. Permira restructured GlobalCollect's debt and equity to provide liquidity to investors while retaining ownership and supporting the company's expansion into new markets.

Management Buyout (MBO) or Management Buy-In (MBI):

An MBO involves the existing management team acquiring the company from the private equity firm, while an MBI involves an external management team taking over. Both strategies allow the private equity firm to exit while providing continuity in leadership for the company. The DACH region has a tradition of family-owned businesses, making management buyouts particularly common, especially in succession planning scenarios.

?Example (MBO): In 2016, German automotive supplier Schlemmer underwent a management buyout led by its existing management team, supported by private equity firm H.I.G. Capital. The MBO allowed Schlemmer's management to acquire the company from H.I.G. Capital, ensuring continuity in leadership and enabling Schlemmer to pursue its growth strategy.

Example (MBI): In 2019, Austrian software company Shpock was acquired by Norwegian media company Schibsted ASA, facilitated by a management buy-in. The new management team, appointed by Schibsted ASA, took over the operations of Shpock, leveraging its expertise to drive growth and expansion in the online marketplace sector.

Dual-Track Process:

Some private equity firms pursue a dual-track process, simultaneously exploring both IPO and trade sale options. This approach allows them to capitalize on market conditions and choose the most favorable exit route. The DACH region's diverse investor base and strong corporate interest make it well-suited for dual-track processes, offering flexibility and optimizing value for stakeholders.

In 2021, German pharmaceutical company Haema AG pursued a dual-track process, exploring both IPO and trade sale options. Ultimately, Haema AG opted for an IPO on the Frankfurt Stock Exchange, raising capital to support its expansion plans while providing existing investors with an opportunity to exit their positions at an attractive valuation.

Conclusion:

As private equity investment continues to thrive in the DACH region, selecting the right exit strategy is crucial for maximizing returns and ensuring the long-term success of portfolio companies. Whether through IPOs, trade sales, secondary buyouts, recapitalizations, management buyouts, or dual-track processes, private equity firms have a range of options at their disposal. By carefully evaluating market dynamics, company performance, and investor objectives, stakeholders can navigate exit strategies effectively and unlock value for all parties involved.