What does the term private equity mean?
Private equity, as a distinct class of investment on the money market, means investment in the funding of companies which are not quoted on the stock exchange by providing equity capital. In this context, “private” stands for the non-public character of the investment. The counterpart is public equity, i.e. financing by means of equity capital raised in the form of share capital on public stock exchanges. “Equity” underlines the ownership character of private equity. While debt capital, which is made available to companies by banks and insurance companies as a loan, earns fixed interest with priority over other liabilities, equity capital participates directly in the company’s profits or losses. The equity capital investor therefore bears a greater risk, as entrepreneurial losses are first offset against equity. Correspondingly, the equity capital investor benefits to an extent much greater than the interest granted to debt capital providers when the business performs well. Equity capital is also fundamentally associated with the legal rights of ownership. The equity capital investor therefore has significantly better opportunities to obtain information and exert influence than a debt capital provider.
What is private equity?
The term “private equity” is used in two senses. On the one hand, it is a general term for the entire private corporate financing market (buy-outs, venture capital and mezzanine financing), and on the other hand private equity also refers to investments in later phases of corporate development. Private equity is, for example, provided to finance expansion strategies, and is in consequence quite distinct from venture capital. Private equity is as a rule made available to established non-quoted companies. The HANNOVER Finanz Group fundamentally only invests in growth phases and in corporate succession, and therefore comes under the second, narrower definition of the term.
What is a private equity fund?
A fund is a group of assets managed by an investment company. Distinctions are made between funds with regard to the strategy they pursue (growth or value strategy), their structure (closed or open funds) and the assets in which they invest (shares, bonds, property, etc.). The HANNOVER Finanz Group’s funds manage private equity investments in medium sized enterprises and, as so-called “evergreen funds”, have no fixed term.
What distinguishes private equity from other financing instruments?
When private equity is used, no recurrent interest or redemption payments are due, as would be the case in financing with debt capital. There is therefore no burden on the business during the private equity investment. The financial investor takes profits in the form of increased value of the holding when the shares in the company are sold. In addition, private equity has a certain catalyst function. When a company is already largely financed by debt capital, taking up new loans becomes more expensive as interest rates rise (Basle II). Involvement of private equity improves creditworthiness and ensures access to new, cheaper debt capital. At the HANNOVER Finanz Group, these two important criteria are in particular accompanied by that of added value: accomplished project managers from various industries make their experience available to the companies. In that way, they work together with the management on strategic matters and so create added value for the business.
What makes the German private equity market special?
Foreign funds have foreign investors, and the funds are mostly based in foreign tax havens. They are asset-managing limited partnerships, and are taxed on the shareholder level abroad. There is exit pressure from limited terms, and there are considerable legal requirements and restrictions imposed by the German Finance Ministry’s letter of 16 December 2003. Significant legal uncertainty is the result. As a rule, the transactions concern large companies and take place with the involvement of a large amount of borrowed capital. The German private equity sector, in contrast, draws its capital from domestic institutional investors (e.g. insurance companies). The funds, based at home, have the legal form of a company limited by shares (AG or GmbH). To protect the investors, they are fiscally non-transparent, and are exempted from trade tax by the German Act on Investment Companies (UBGG). As a rule, under the Tax Relief Act of 2002, they are also exempt from corporation tax. There is no limitation to the term, and the legal position is clear. The companies in the portfolio have the structure of medium sized enterprises, and the transactions performed for expansion or buy-out funding are notable for the large proportion of equity capital involved. The HANNOVER Finanz Group, as a German financial investor, concentrates on medium sized businesses and has a background as a recognized private equity partner to medium sized, owner-managed companies in Germany.
What has to be considered when deciding for private equity?
The right timing plays a central role in the decision to take a private equity partner on board. The following reasons may also play a part in that decision:
- The current shareholders wish to reduce their holdings in the company. In this case, an investment can be made in the company by its current management (management buy-out, MBO) or external managers who are familiar with the industry and have identified potential (management buy-in, MBI), together with a private equity partner.
- The company has potential for growth which cannot be exploited with the existing capital structure.
- The company is to be spun off from a larger group.
- The company lacks a competent financial partner who is entrepreneurially minded and has the same objectives.
What industries does HANNOVER Finanz invest in?
Fundamentally, the HANNOVER Finanz Group invests in any industry. The conditions for investment are the following: The company must have an experienced and committed management as the key factor for success. The HANNOVER Finanz Group does not intervene in day-to-day business, but merely provides assistance, for example in strategic issues. Furthermore, the company must be a market leader or niche supplier in an attractive segment, and must be able to make a plausible case for future growth. The company should also exceed the critical mass of 20 million euros in sales. The companies in which investment is potentially to be made must be well-established on the market. The HANNOVER Finanz Group does not invest in businesses which are in the seed or start-up phases, and also not in companies in crisis. There are other specialists for such cases.
How many funds does the HANNOVER Finanz Group have?
The HANNOVER Finanz Group currently has seven funds. These are:
- Commerz Unternehmensbeteiligungs AG
- WeHaCo Unternehmensbeteiligungs-GmbH
- HFA Eins Beteiligungs GmbH Vienna
- HF-Fonds VII Unternehmensbeteiligungsgesellschaft mbH
- HF-Fonds IX Unternehmensbeteiligungsgesellschaft mbH
- HF-Fonds X Unternehmensbeteiligungsgesellschaft mbH
- GBK Beteiligungen AG
In which phases of corporate development is the investment made?
The company is growing at a disproportionate rate or has above-average growth potential
- MBO (Management Buy-Out)
The existing management in the company, which is highly familiar with the industry, acquires the shares from the former shareholders.
- MBI (Management Buy-In)
A manager from outside who fits in well with the company takes over the shares from the former shareholders.
Large corporate entities divest themselves of a subsidiary which no longer fits within their core business. This occurs in connection with an MBO/MBI.
- Preparation for IPO
A company is seeking a solvent financial investor to assist in the initial public offering.
What sets HANNOVER Finanz apart from other private equity companies?
The HANNOVER Finanz Group has funds which are structured as “evergreens”, and so have no limit to the term for which they run. The investments therefore do not have to be sold within any particular period. That is what happens in “closed end” funds, which typically hold their investments for periods of 5 to 10 years. Furthermore, HANNOVER Finanz is also prepared to invest as a minority shareholder to fund growth in some cases. This is a relatively atypical attitude in the private equity sector. The investment managers at HANNOVER Finanz have acquired broad expert knowledge of medium sized , owner-managed businesses in their previous activities. Their understanding of the concerns and needs of medium sized businesses is regarded as a key factor for a successful partnership. At HANNOVER Finanz, entrepreneurs talk to entrepreneurs.
Does the HANNOVER Finanz Group invest openly or as a silent partner?
Fundamentally, both open and silent partnerships are possible with the HANNOVER Finanz Group. A silent partnership is however usually coupled with an open investment and is only entered into in exceptional cases.
How are arrangements made for the exit?
As a result of the evergreen fund structure, the HANNOVER Finanz Group is highly flexible in its exit strategy. Agreements on an exit are made in cooperation with all parties involved. The exit is tailored to suit the individual investment, so that an optimum solution for both sides is achieved. The management of the company in which the shares are held is involved in the sale process, as an expression of a partnership based on mutual trust and confidence.
What say does HANNOVER Finanz have in the running of the business?
The HANNOVER Finanz Group has no intention of intervening in the operational business of the companies in which it invests, but rather relies on the skills of the management. It does however reserve the right to have a voice in strategic decisions above all. This is provided for by corresponding membership of the company’s advisory board.
How long is the investment retained?
The term of the investment depends on individual agreements between the HANNOVER Finanz Group and the company in which it invests. Short financing periods for bridging purposes in preparation for an initial public offering can be envisaged. In long-term growth funding, periods which even exceed a horizon of 20 years are also possible.
What references does the HANNOVER Finanz Group have?
As a result of its long-established presence on the private equity market, the HANNOVER Finanz Group has a large number of references. For that reason, an extract from the list of former HANNOVER Finanz investments can be found under the following link:
List of former investments
How can I make contact with a project manager?
What is the history of the HANNOVER Finanz Group?
The HANNOVER Finanz Group was founded by HDI in 1979, and ranks among the first venture capital providers in Germany. In 1993, a management buy-out took place, establishing the company’s independence from banks and major corporate groups. Today, with over 200 successfully completed projects, the HANNOVER Finanz Group looks back on almost 40 years of history. The portfolio currently comprises around 50 companies, with invested capital of around 450 million euros. A further 200 million euros is available for new investments. The HANNOVER Finanz Group has cumulatively invested over one billion euros since its foundation.
What is the basis of the HANNOVER Finanz Group’s success?
The success story of the HANNOVER Finanz Group is based on its strategic orientation and consistent reliance on the core competencies of the business. An internal network of 20 professionals with backgrounds in medium sized enterprises and an extensive external network of specialists, including eminent law and accountancy firms, secure the sustainable success of the Group.