Private Equity

Private equity is equity capital invested in companies outside the stock exchange. Funds raise money from investors, use it to buy companies, develop them over several years, and later sell them again. The goal is to significantly increase the value of the companies during this period. The usual structure is a closed-end fund with a life of around ten years in which institutional investors commit capital and a manager makes the investment decisions. The manager is paid a management fee and carried interest above a preferred return.

Returns come from three sources: operational improvement, debt reduction from ongoing cash flow, and the difference between entry and exit multiple. The asset class is divided into segments, in particular buyout with majority stakes and leverage, growth equity with minorities and little debt, and venture capital in the early stage. For the German Mittelstand the asset class matters above all in succession, because it offers an alternative to selling to a competitor and allows continuity for the business while the owner receives liquidity and often participates in further development through a rollover. High leverage, the limited time horizon and the question of how much value creation comes from operational work rather than favourable market conditions are the subjects of critical debate.

The German market is strongly oriented towards the Mittelstand, where succession situations account for a substantial share of transactions. Fund managers are regulated under the German Investment Code, which requires either registration or a full licence depending on fund size and imposes requirements on risk management, valuation and reporting. For business owners, then, what matters alongside price is how a fund has dealt with troubled holdings in the past.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.