PRIVATE EQUITY
What is private equity?
Most people in Germany will already have encountered private equity in some form or other, often without even realising it. Perhaps you have a pension plan or life insurance policy that invests in private equity funds. Or maybe you work for, or are a customer of, one of the many companies that have been financed by private equity in the past or are currently being financed by it. Examples include Douglas, Gorillas, Zalando, Lieferheld, Schleich, Metabo, Compo, Verivox, Rodenstock, Interhyp and FlixBus, to name a few.
Private equity refers to capital invested by institutional investors in companies that are not listed on a stock exchange, via private equity firms. These firms – or the funds they manage – purchase shares in companies they believe will increase in value over time. These could be family-owned SMEs, subsidiaries of larger companies, or even small start-ups.
There are many reasons for companies to sell shares to private equity funds:
- Entrepreneurs want to dispose of their shares as part of their succession plan
- A group wants to divest a subsidiary that no longer fits with its future business strategy
- Start-ups need capital to get their ideas off the ground.
When a private equity firm gets involved, this opens up a myriad of new possibilities for the companies:
- They can use the additional capital to develop new products
- Enter new markets or
- Acquire competitors.
The aim of the private equity firms is to make the companies better and more competitive – and therefore more valuable. Private equity firms predominantly support the development of new companies and German SMEs. In view of their key target companies, private equity is therefore primarily a tool for start-up and SME financing.
A large proportion of the capital for private equity funds comes from the UK, USA and Canada. This is because the retirement systems in these countries – unlike in Germany – are exclusively based on pension funds rather than a pay-as-you-go system.
These funds manage the contributions paid into them by the insured persons and profitably invest a substantial portion of these contributions in private equity funds. With the – often two-figure – returns that the funds generate, they secure the retirement income for many employees. Institutional investors (like insurance companies, banks and pension funds) are the sources of capital for private equity firms.
The private equity investment class is now firmly established as an integral component of institutional investment strategies: Virtually all institutional investors (such as insurance companies and banks) provide capital for private equity firms and their funds. In addition, many institutions like banks (including savings banks) invest private equity in companies directly via their own subsidiaries. The state and development banks in the individual states also invest in private equity funds or directly in the companies themselves.