“DURING THE global financial crisis we devoted all our energy to rescuing companies we already owned,” says Johannes Huth, the European boss of KKR. This time the private-equity (PE) firm is well prepared to take advantage of economic calamity, as are many of its rivals. Four-fifths of KKR’s staff are looking after the companies in its portfolio, which range from Acciona, a Spanish renewable-energy firm, to Upfield, a Dutch margarine-maker. The rest are nosing around for opportunities.
The handful of deals taking place are mostly concentrated in tech and health care. Last month EQT, a Swedish PE firm, agreed to take over Schülke, a German maker of disinfectants, for roughly €900m ($990m). But “buy-out activity is pretty much dead,” says Lukas Schäfer of McKinsey, a consultancy.
Not much is expected to happen until August. Companies will publish earnings figures for the second quarter, when governments’ measures to contain the virus were at their strictest, making the extent of the corporate carnage clearer. Until then PE firms will focus on their most troubled existing investments. A tenth of EQT’s global portfolio, for instance, sits in the hard-hit leisure and travel industries.
Even so, Mr Huth reckons PE might largely be able to weather the crisis. In a world of negligible interest rates, demand for alternative assets will continue to hold up. Christian Sinding, EQT’s chief executive, even thinks the crisis will strengthen the industry, thanks to a mountain of “dry powder” that enables it to snap up bargains (see article).
PE-owned firms seem to be making little use of government aid in Europe. Some are using layoff schemes, such as Germany’s Kurzarbeit, which pays more than two-thirds of the net salaries of furloughed workers. But others are put off by the strings attached to the subsidies, such as job guarantees. And many do not qualify for state-backed loans, because their debt is too high. The European Union also bans firms with accumulated losses exceeding 50% of share capital from receiving state aid. The PE industry is lobbying the European Commission to relax the rule.
The crisis is a test of PE’s staying power in the continent. Britain used to be the most attractive market in Europe, says Detlef Mackewicz of Mackewicz & Partner, an investment adviser, followed by Scandinavia, the Netherlands and Germany. Germans, for their part, were once wary of PE: a senior politician branded the funds as asset-stripping “locusts”. But in recent years the mood has shifted. The value of disclosed deals in Germany reached an all-time high of €32bn in 2019. This year began with one of the biggest PE deals in Europe: the €17bn takeover of Thyssenkrupp Elevator by a consortium led by Advent International and Cinven, two PE firms.
With Germany expected to recover more quickly than other big European economies, it seems likely to retain its newfound position as the continent’s most attractive market. In 2007 Randolf Rodenstock of Rodenstock, a family firm that makes spectacles, said that his locusts were really honey bees. Bosses today are only more likely to share the sentiment. ■
This article appeared in the Finance & economics section of the print edition under the headline “From locusts to honey bees”