The Mittelstand companies in the DACH region (Germany, Austria, and Switzerland), characterised by their small to medium size and often family-owned operations, are essential to the economic stability of their respective countries. However, these firms frequently fly under the radar of many larger institutional investors. Yet, for those with strategic foresight, these very enterprises offer a wealth of opportunity. A notable exponent of this perspective is Winterberg Group which is laser-focused on Buy & Build investment strategy.

The backbone of the DACH region’s economy, Mittelstand companies blend stability, resilience and niche market domination, often powered by an unrivalled degree of specialised knowledge. These attributes, along with their substantial employment creation and export potential, make them significant contributors to the regional GDP and societal stability. The Buy & Build investment strategy, focusing on the acquisition of a company that subsequently serves as a platform for further acquisitions, has proven to be incredibly potent within the Mittelstand universe. The DACH region, teeming with highly specialised, often complementary companies, is ripe for this approach.

Our Managing Partner, Fabian Kröher, shed some light on why this strategy has been so successful:

“The Buy & Build strategy aligns perfectly with the Mittelstand culture. These enterprises are often at the forefront of innovation, demonstrating extraordinary resilience in niche markets. With each strategic acquisition, we can integrate new product lines, broaden market reach or bolster existing capabilities, resulting in a stronger, more versatile entity. Essentially, we’re capitalising on the inherent strengths of these Mittelstand companies – their stability, innovative potential and profound market knowledge serve as the ideal foundation for growth.”

The returns stemming from this approach in the DACH region have been nothing short of remarkable. A well-executed Buy & Build strategy can spur significant revenue and EBITDA growth, create meaningful economies of scale and strengthen market positioning, ultimately enhancing the appeal of the combined entity for future exit opportunities, be it via a sale to financial investor or a strategic player.

Buy & Build strategy is inherently capable of mitigating the risks that are typical for Mittelstand

Succession Planning: Many Mittelstand companies are family-owned, often managed by founders or their descendants. The problem arises when the current management grows old or wants to retire. It’s not always guaranteed that the next generation will be willing or capable to take over. There may also be disputes among family members over leadership. Inadequate succession planning can lead to leadership gaps, business disruption, or even the sale or closure of the company. If there’s a lack of suitable successors in the family, a Buy & Build strategy could help. When we buy the company, if the need exists, we bring in professional management. This helps ensure a smooth transition and continued growth, without the need for family succession. The ongoing succession challenges faced by many Mittelstand owners, with impending retirement and no obvious successors. This dynamic offers an added opportunity for investors, like Winterberg Group, implementing a Buy & Build strategy, as these owners may be more inclined to sell to an investor who guarantees their legacy’s ongoing success.

Digital Transformation: Digital transformation involves using digital technologies to create or modify existing business processes and customer experiences to meet changing business and market requirements. While it provides opportunities to innovate and improve efficiency, it also poses challenges. Many Mittelstand companies may lack the necessary technical skills or financial resources. Failure to successfully transform can lead to lost competitive advantage, inefficiencies and lower profitability. We provide both financial resource and technical expertise to drive the company’s digital transformation. This would help the company stay competitive and increase efficiency without needing to develop these capabilities in-house.

International Competition: Globalisation has expanded markets, but it has also increased competition. Companies worldwide can offer similar products or services, sometimes at lower costs due to factors like cheaper labor or raw materials. This can put significant pressure on Mittelstand companies’ revenues and profitability, especially those that are highly specialised in a particular niche. A Buy & Build strategy could help companies scale and expand their operations more rapidly, helping them compete more effectively on the global stage. With more resources and a broader reach, they can better face off against international competitors.

Supply Chain Risks: Global supply chains can be disrupted by various events such as political instabilities, trade disputes, natural disasters or pandemics. Such disruptions can lead to increased costs, delays, or inability to deliver products or services. Mittelstand companies may lack the resources or expertise to manage these risks effectively compared to larger, multinational firms. Winterberg brings expertise in supply chain management and risk mitigation strategies gathered during our Managing Directors’ prior expertise in top Strategy Consulting firms. Moreover, a larger, more diversified company may have a more resilient supply chain, with more options for sourcing materials and distributing products.

Economic Conditions: A company that’s part of a Buy & Build strategy can better weather economic downturns due to its greater size and diversification. It may also have more resources to hedge against economic risks, such as fluctuations in interest and exchange rates.

The potential of Mittelstand companies in the DACH region is immense. For investors like Winterberg Group, that recognise the inherent value in these enterprises and have mastered the Buy & Build strategy, the opportunity for exceptional returns is not only possible but likely. Winterberg Group’s success underscores the effectiveness of this approach in the vibrant and promising segment of the DACH market.

The world of mergers and acquisitions (M&A) and private equity (PE) has undergone a significant transformation in recent years, driven by the rapid advancement of digitalisation. Digital technologies have improved various aspects of these industries, including deal sourcing, matchmaking, due diligence, valuation, and parts of the post-merger integration.

Streamlining sourcing and matching

Digitalisation enables the collection and analysis of vast amounts of data, providing valuable insights that aid in the matchmaking process. Through data analytics, dealmakers can identify patterns, similarities, and potential synergies between companies. By leveraging data-driven intelligence, M&A and PE professionals can identify the most suitable counter-parties based on factors such as market positioning, customer profiles, financial performance, and growth potential. Moreover, digital tools offer sophisticated search and filtering capabilities that enable professionals to narrow down potential counter-parties based on specific criteria. This enables advisors to identify perfectly-matched companies based on industry, geographic location, financial metrics, growth rates, and other relevant factors. This targeted approach helps match buyers with sellers that align with their strategic objectives and investment criteria, saving time and effort in the process and enabling foremost advisors to address the best possible buyers significantly outside their usual network. As a result, digital channels, foremost online deal platforms, accounted for more than 20% of the deal-sourcing activities in 2022, up from 5% in 2016.

Automation of Due Diligence

Data analytics plays a vital role in the due diligence process by enabling companies to extract meaningful insights from large volumes of data. Traditionally, due diligence involved a manual review of documents and financial statements, which was time-consuming and prone to human error. With data analytics, companies can now automate the analysis of financial data and other relevant information. Such automated data analytics systems employ advanced algorithms to analyse various data sources for inconsistencies. By scanning through these data sets, these systems can quickly identify potential red flags that warrant closer scrutiny. Red flags can encompass financial irregularities, legal or regulatory non-compliance, operational inefficiencies, or other indicators of risk. These automated systems are designed to flag inconsistencies, outliers, and patterns that may raise concerns during the due diligence process. Automated data analytics systems can also assess compliance with regulatory requirements. By cross-referencing the target company’s activities against relevant laws and regulations, these systems can identify potential violations or gaps in compliance. As a result, foremost larger M&A transactions can be completed more cost-effectively.

Improving post-acquisition integration

Digitalisation plays a crucial role in post-merger integration and value creation. Advanced project management tools, collaboration platforms, and automation technologies enable smoother integration of systems, processes, and cultures. Especially if the acquisition needs to fit into a larger operating group, digital data solutions significantly simplify portfolio management efforts.  By consolidating and aligning data, organisations gain a holistic view of their operations, financials, and customer information, facilitating better decision-making and the identification of synergies.

Furthermore, digital tools enable efficient collaboration and communication among teams involved in the integration process. Cloud-based project management software and virtual meeting platforms foster real-time collaboration, regardless of geographical location. This transparency and cross-functional teamwork accelerate the integration process. Digitalisation also allows for process automation, reducing manual effort and increasing efficiency. Organisations can utilise robotic process automation and workflow automation tools to streamline repetitive tasks, freeing up resources to focus on strategic integration initiatives.

“We see the importance of digitalisation efforts, when it comes to creating additional value for our portfolio companies, especially when it comes to identifying cross-synergies between different companies. Without sophisticated data tools, we’d probably miss out on quite a few synergies”, says Fabian Kroeher, Executive Director at Winterberg Group.

Improving deal quality

Digitalisation can significantly improve deal quality in M&A transactions by increasing transparency on both the buyer and seller sides. Transparency plays a crucial role in reducing the number of buyers who lack the financial capability to fund the deal and sellers who are reluctant to sell. On the buy-side, digitalisation allows potential acquirers to showcase their financial strength and credibility. Online platforms and databases provide access to information about a buyer’s financial history, track record, and available funds. This transparency helps filter out buyers who may not have the necessary financial resources to complete the transaction, ensuring that serious and capable buyers are involved in the deal process.

Similarly, on the sell-side, digital platforms could enable sellers to convey their intent to sell and provide relevant information about their company’s financials, operations, and growth prospects. This transparency can ensure that only sellers who are genuinely interested in selling their business participate in the M&A process, reducing time wasted on negotiations with sellers who are not committed to a deal. By leveraging digitalisation, M&A professionals can conduct thorough background checks, verify financial capabilities, and assess the seriousness of both buyers and sellers. This leads to improved deal quality as it minimises the likelihood of wasted efforts, failed negotiations, and disappointing outcomes.

“Overall we still see quite a few processes, where sellers don’t really intend to sell or buyers, who enter processes with no funds. We really hope that the overall deal quality can further improve through implementing digital processes – otherwise, it gets pretty frustrating from time to time”, says Fabian Kröher, Executive Director at Winterberg Group.

Conclusion

The digitalisation of the M&A and PE field has unleashed a wave of innovation, transforming traditional processes and unlocking new opportunities. The current level of implementation helps buyers and sellers to find each other easier, have more efficient due diligence, as well as improve portfolio management efforts for private equity players. However, there are little to no solutions in the market to help improve the deal quality. Nonetheless, the future of M&A and PE lies in further digitalisation and further process streamlining.

The world of alternative investments is vast and encompasses many asset classes. Two of this space’s most prominent investment strategies are Private Equity and Venture Capital. These asset classes have unique characteristics, risks and potential rewards for limited partners (LPs), i.e. investors in Private Equity and Venture Capital funds. In this article we will explore the performance of Private Equity versus Venture Capital for LPs.

Understanding Private Equity and Venture Capital

Before diving into the performance comparison, it’s essential to understand the fundamental differences between Private Equity and Venture Capital.

Private Equity

Private equity refers to investments in non-publicly traded private companies. These investments often involve significant capital infusions to help companies grow, restructure or improve their operations. Private equity firms typically acquire controlling stakes in these companies and work closely with management to create value for all stakeholders.

Venture Capital

Venture Capital is a type of Private Equity focused on investing in early-stage, high-growth potential startups. Venture capitalists provide financing, strategic guidance and networking opportunities to help these startups scale and achieve success. The investments in Venture Capital are often smaller and more speculative than those in Private Equity, as the companies receiving funding are typically at an earlier stage in their development.

Performance Comparison: Private Equity vs. Venture Capital

Several factors come into play when comparing the performance of Private Equity and Venture Capital for LPs.

1. Returns

Historically, Private Equity has consistently generated higher returns than Venture Capital. According to the Cambridge Associates US Private Equity Index, the 10-year annualised return for Private Equity was 13.7% as of Q2 2021, while the 10-year annualised return for Venture Capital was 11.9%. Other sources see an even wider spread between the different types of Private Equity (Fund-of-funds, Growth, Buyout and other) and Venture Capital, such as the analysis depicted below.

However, this does not mean that Venture Capital investments are inherently less attractive – the risk-return profile is different, with Venture Capital investments carrying higher upside potential and risks.

2. Risk

Venture capital investments are inherently riskier than Private Equity investments. Early-stage companies face numerous challenges, such as product-market fit, market adoption and competition. As a result, many startups fail, and Venture Capital investors must rely on a few successful investments to generate most of their returns.

By contrast, Private Equity investments typically involve more established companies with proven business models and cash flows. While risk is still involved, Private Equity investors can often mitigate these risks through active management and operational improvements.

3. Diversification

Both Private Equity and Venture Capital investments can provide valuable diversification benefits for LPs. These asset classes have historically exhibited low correlations to traditional asset classes, such as stocks and bonds, which can help reduce overall portfolio risk.

However, the level of diversification within each asset class can vary. Venture capital investments are often more concentrated in specific sectors, such as technology or healthcare, while Private Equity investments can be more broadly diversified across industries.

4. Liquidity

Private equity and Venture Capital investments are illiquid, meaning they cannot be easily bought or sold like publicly traded stocks. Investment horizons for both asset classes typically range from five to ten years, which can pose challenges for LPs who require liquidity.

Winterberg Group’s Approach: A Balanced Strategy

At Winterberg Group, we recognises the distinct characteristics of Private Equity and Venture Capital investments. While we are focusing on Private Equity, we have developed a balanced approach to maximize returns while mitigating risks for our LPs.

1. Sector Focus

Winterberg Group strategically invests in high-growth sectors to capitalise on market trends and opportunities. By focusing on industries such as technology, healthcare, water, certification and sustainability, Winterberg Group is well-positioned to benefit from the growth potential of these industries.

2. Active Management

Winterberg Group takes an active approach to managing its investments. By working closely with portfolio companies, we can help drive operational improvements, enhance efficiencies and unlock value. This hands-on approach is a crucial differentiator for the Winterberg Group, as it allows them to generate value from their investments beyond mere capital infusions.

Fabian Kroeher, Co-Founder and Executive Director of Winterberg Group, brings a wealth of knowledge and experience to the table. With a deep understanding of the investment landscape, Fabian Kröher and his team have demonstrated a consistent ability to identify attractive investment opportunities, conduct thorough due diligence and execute value-enhancing strategies.

3. Diversification

Winterberg Group understands the importance of diversification for their LPs and seeks to provide a balanced mix of Private Equity and Venture Capital investments in their portfolio. This approach allows us to benefit from the high return potential of Venture Capital investments while also enjoying the relative stability of Private Equity investments.

4. Selectivity

The Winterberg Group is highly selective in choosing its investments. We conduct thorough due diligence on potential investment opportunities to ensure we align with the firm’s strategic objectives and growth potential. This disciplined approach helps Winterberg Group mitigate risks and maximize returns.

Final Words

In conclusion, Private Equity and Venture Capital offer unique benefits and risks for limited partners. While Private Equity investments tend to provide more stable returns and involve less risk, Venture Capital investments offer higher growth potential but with increased risk. The proper allocation between these asset classes depends on an LP’s specific investment objectives, risk tolerance and diversification needs.

“The Winterberg Group has developed a balanced approach to investing in Private Equity and Venture Capital. By focusing on high-growth sectors, active management, diversification and selectivity, we seeks to achieve an attractive risk-return profile”, says Fabian Kröher, Executive Director at Winterberg Group.

GDP: Recession is not happening

With the release of robust data for Q1 2023, there is growing optimism that Germany’s GDP may avoid a decline in 2023, thus averting a recession.

The global economic landscape, including issues with global supply chains, has improved significantly. However, despite this improvement, there remains a heightened level of uncertainty. Real income losses due to high inflation are expected to continue, which is likely to dampen investment spending and private consumption in the first half of the year.

As tighter monetary policies begin to take effect and a potential recession looms in the United States, anticipated to begin in the fourth quarter, any economic recovery later in the year is expected to be modest. Therefore, we tend to agree with forecasts for German GDP growth in 2023 to remain at 0%, although there have been increased upside risks since the beginning of the year.

In Chancellor Scholz’s government declaration on 27.02.2022, he argued that the shock caused by the Russian invasion of Ukraine marked a historic turning point, referred to as a “Zeitenwende” in German. This term holds strong positive connotations in Germany, as it is reminiscent of the reversal associated with German reunification in 1989/90. However, the current “Zeitenwende” is brought about by the actions of the country that had facilitated German reunification, and it signifies a significant shift. Russia’s attack has underscored that the socio-economic development with the prevalence of Western, liberal democracies has not reached a happy ending.

The implications of this historic turning point will play a crucial role in shaping social and economic developments particularly in the medium and long term. However, these implications are currently difficult to identify and understand, which may explain the cautious adjustments to policies and corporate strategies. These adjustments seem inconsistent with the intentions expressed in speeches and surveys, and this discrepancy has caught the attention of many observers.

Even for the more cyclical developments expected in the next 12 to 24 months, uncertainty looms large. Typically, during stable periods, cyclical fluctuations occur around a consistent trend, with uncertainty limited to minor variations in estimated trend growth. However, concerns now exist that the incline of the trend might become much shallower.

These uncertainties are impacting the behavior of market players, evident in more prudent spending and investment decisions, as well as the emergence of new priorities. Yet, these new priorities have not yet led to a pronounced reassessment of existing ones. The current “Zeitenwende” coincides with a series of other reversals in areas such as monetary policy, climate policy, transport policy, and gradually deteriorating demographic trends. Consequently, budgetary constraints are likely to become more pressing, as already indicated by the ongoing budgetary debates among various ministries in preparation for next year’s federal budget.

CPI Revisions: Lower Inflation Level Fails to Alleviate Concerns

The comprehensive overhaul of Germany’s Consumer Price Index (CPI) for 2023 resulted in a notable decrease in the inflation level. For 2023, we now anticipate an annual average of around 6%, while for 2024, our forecast stands at 2-2.5%. These adjustments primarily reflect technical factors rather than a shift in our overall perspective on inflation dynamics.

We still expect a substantial decline in the headline inflation rate throughout 2023, thanks to significant energy price base effects. However, despite the “disinflationary” influence stemming from energy, core inflation could remain persistently high during the first half of 2023 before gradually easing in the second half. We acknowledge the risk that robust wage outcomes and potential second-round effects may keep core inflation in the range of 5% or higher for an extended period.

Although the revised CPI indicates a lower inflation level, concerns persist regarding core inflation and its potential impact.

German Industry: Anticipating a Minor Setback in 2023, Automotive Sector Shows Signs of Recovery

It is expected that domestic production in Germany’s manufacturing industry will experience a slight decline of -0.5% in 2023 (compared to -0.4% in 2022). Considering the assumption of a moderate economic recovery in the Eurozone throughout 2023 and 2024, with the United States potentially facing a recession in the first half of 2024, domestic production in the German manufacturing sector could see a modest growth of 1% next year. However, this estimate would still place the output level 7% below the historical peak reached in 2018.

Once again, there is an expectation of a notable decrease in production within energy-intensive industries in 2023. The chemical industry might experience another double-digit decline (following a -11.6% decrease in 2022).

On a positive note, with the easing of supply problems for semiconductors and high demand backlog, the automotive industry could see a substantial 10% increase in domestic production. However, for other capital goods producers, we exercise caution. The mechanical industry’s production is projected to rise by 1% in 2023, while electrical engineering may experience a 3% increase due to a high order backlog.

In 2022, German producer prices for industrial products saw a significant average increase of over one-third. This marked the highest increase since the inception of the time series in 1949. However, starting in October 2022, producer prices began to decline on a monthly basis. With lower energy prices and a weaker order intake, this downward trend could persist for several more months. On average, producer prices may experience a slight decrease compared to the levels observed in 2022.

In contrast to energy-intensive industries, capital goods producers demonstrated stronger performance in 2022, despite facing supply shortages for intermediate goods. Electrical engineering witnessed a notable increase in domestic production, reaching 4.3%. This sector continues to benefit from heightened demand driven by structural trends like digitisation and investments in green technologies. Additionally, the accumulation of a high order backlog over the past years, resulting from ongoing disruptions in the supply chain, provided support. Mechanical engineering in Germany experienced a modest 0.6% rise in production in 2022. While the sector still maintains a substantial order backlog, new orders declined by 6% due to increased interest rates and economic uncertainty linked to the conflict in Ukraine.

The automotive industry in Germany reported its first output increase since 2017, with a growth of 3.1% in 2022. However, the production index remained 24% below the previous peak in 2017. Among all industrial sectors, the automotive industry faced significant challenges with supply shortages, particularly in semiconductors. Orders were canceled at the onset of the COVID-19 pandemic, and subsequent supply retrieval proved insufficient due to full capacity utilization in the semiconductor industry driven by higher demand from other sectors. These shortages, coupled with disruptions related to the conflict in Ukraine, weighed on German production in recent years. Although demand for new vehicles gradually recovered, the automotive industry continued to face supply chain issues. As of February 2023, the latest IFO survey revealed that 74% of automotive companies still reported shortages in intermediate goods, though this number has decreased from previous peaks.

Structurally, the shift towards electric mobility triggered reorganisation measures at various production sites in Germany, including suppliers, resulting in reduced available capacities. Furthermore, German automotive factories in the volume car segment encountered difficulties competing successfully with intragroup sites located in other countries. The 3.1% increase in domestic output in 2022 halted the previous downward trend, and a further recovery is expected in 2023 due to anticipated easing of supply chain disturbances.

The pharmaceutical industry witnessed the highest increase in production in Germany during 2022, with a growth rate of 5.1%. It has been the most dynamic industrial sector in terms of domestic output, with the production index surpassing 2015 levels by 23% (while total manufacturing experienced a decline of 3.3%). The increased prevalence of respiratory illnesses, including COVID-19, in Germany contributed to high demand for medications, leading to temporary shortages. Additionally, the pharmaceutical sector benefits from structural trends such as an aging society.

Swiss Perspective

“For us at Winterberg, despite recent bank runs, Switzerland remains to be a smaller yet more stable and resilient market. That is also reflected in macro forecasts by the leading research institutions.” – Fabian Kröher commented on a topic.

The macroeconomic outlook for Germany and Switzerland presents notable differences in terms of real GDP growth and inflation projections. Switzerland is expected to outperform Germany in terms of economic growth, with forecasted real GDP growth of 0.6% in 2023 and 1.4% in 2024. In comparison, Germany’s real GDP growth is forecasted to remain stagnant at 0% in 2023 and show a modest increase of 1% in 2024. This suggests a more favorable growth trajectory for Switzerland, indicating a stronger economic performance in the coming years.

Regarding inflation, Switzerland is projected to experience lower inflation rates compared to Germany. In 2023, Switzerland’s inflation is forecasted at 2.4%, while Germany is expected to face higher inflation at 6.1%. Looking ahead to 2024, Switzerland’s inflation is expected to decrease to 1.5%, whereas Germany’s inflation is projected to decline to 2.3%. These figures indicate that Switzerland is expected to maintain a relatively stable and lower inflation environment compared to Germany, suggesting potentially better price stability and cost management in the Swiss economy.

Overall, based on these projections, Switzerland appears to have a more favorable macroeconomic outlook in terms of real GDP growth and inflation compared to Germany. Switzerland is expected to achieve positive economic growth, albeit modest, and maintain lower inflation rates. In contrast, Germany is facing the challenge of minimal economic growth in the near term and higher inflationary pressures. These contrasting outlooks highlight the differences in the economic dynamics and policy environments of the two countries.

Investing in Small and Medium-sized Enterprises (SMEs) can be an attractive option for Limited Partners looking for investment opportunities. SMEs can offer the potential for high returns and a chance to support emerging businesses and the broader economy. However, potential downsides also need to be considered before making any investment decisions. We at Winterberg Group know a lot about investing in small and medium-sized companies (SMEs). We can also help Limited Partners understand the good and bad things about this type of investment. The Winterberg Group, led by Co-Founder and Executive Director Fabian Kroeher, has been a critical player in SME investing, providing essential support and guidance to Limited Partners (LPs) looking to capitalise on this growing market. However, investing in SMEs has unique challenges and rewards like any investment strategy. This article will explore the pros and cons of investing in SMEs for Limited Partners focusing on the Winterberg Group approach to SME investment.

The Pros of Investing in SMEs for Limited Partners

High Growth Potential

SMEs often exhibit more significant growth potential compared to larger, more established companies. Smaller businesses can scale rapidly as they are more agile and better equipped to adapt to changing market conditions. For Limited Partners seeking high returns on investment, SMEs can offer a lucrative opportunity.

Portfolio Diversification

Investing in SMEs allows Limited Partners to diversify their investment portfolios, reducing the risk associated with concentrating investments in a single industry or asset class. By allocating capital across multiple small businesses operating in different sectors, LPs can mitigate the impact of market volatility and enhance their portfolio’s overall stability.

Access to Innovative Business Models

Private equity investors have a unique opportunity to tap into the innovative potential of SMEs. These dynamic companies are often at the forefront of developing cutting-edge products and services that can disrupt established industries. Limited Partners can gain access to new markets and technologies by investing in SMEs, positioning themselves for long-term growth.

Economic and Social Impact

Investing in SMEs benefits the individual investor and contributes to economic growth and job creation. SMEs are the backbone of many economies, accounting for a significant share of employment and GDP. By supporting the development of these businesses, Limited Partners can positively impact the broader economy.

Expert Guidance from Winterberg Group

With the support of experienced firms like Winterberg Group, Limited Partners can navigate the complexities of SME investing with greater confidence. Fabian Kroeher and his team offer a wealth of knowledge and expertise helping LPs identify promising investment opportunities and manage their portfolios effectively.

The Cons of Investing in SMEs for Limited Partners

Higher Risk

SME investments can carry a higher risk level than investments in larger, more established companies. Small businesses often face unique challenges, such as limited access to capital, making them more vulnerable to economic downturns and financial stress. As a result, Limited Partners should be prepared to accept a higher degree of risk when pursuing SME investments.

Illiquidity

SME investments are generally less liquid than investments in publicly traded companies. This is because shares in small businesses are not typically traded on a public exchange, making it more difficult for investors to sell their holdings quickly and easily. Limited Partners should be prepared to hold onto their SME investments for an extended period, as they may need more liquid assets to exit the investment.

Limited Information and Transparency

SMEs are often held companies, so they are not subject to the exact disclosure requirements of publicly traded corporations. This can make it challenging for Limited Partners to access accurate and timely information about their investments’ financial health and performance. To mitigate this risk, LPs should work closely with experienced firms like Winterberg Group, which can provide valuable insights and due diligence support.

Management Risk

The success of an SME investment is heavily influenced by the quality of the company’s management team. In some cases, small businesses may need more experienced leadership or have limited resources to attract top talent. Limited Partners should carefully assess the management capabilities of any SME they are considering investing in, as this can significantly impact the potential return on investment.

Regulatory and Compliance Challenges

SMEs may face unique regulatory and compliance challenges, particularly as they navigate the complexities of cross-border operations and international expansion. Limited Partners should know these risks and work closely with firms like Winterberg Group, which can provide expert guidance on navigating the evolving regulatory landscape.

Winterberg Group and Investing in SMEs

Winterberg Group is an investment firm that specialises in supporting SMEs. Founded by Fabian Kroeher – Co-Founder and Executive Director of Winterberg Group – the firm provides funding and support to SMEs in their early development stages. Winterberg Group works closely with SMEs to offer guidance and expertise to help them succeed. Investing in SMEs through the Winterberg Group can allow limited partners to benefit from the potential high returns of SMEs while minimizing the risk. Winterberg Group conducts extensive due diligence on each SME before investing, ensuring that the company has the potential to succeed. Winterberg Group also provides ongoing support to the SME, helping to ensure that the investment is successful. Winterberg Group’s investment strategy is centered around long-term value creation. The firm actively manages the businesses they invest in, working closely with the management team to help drive growth and create value. Winterberg Group’s expertise in the SME sector allows them to identify investment opportunities that have the potential to yield high returns.

Conclusion

Investing in SMEs offers Limited Partners a unique set of rewards and challenges. While the potential for high growth and diversification is appealing, investors need to know the risks associated with this asset class. By partnering with experienced firms like Winterberg Group, led by Fabian Kroeher, Limited Partners can make informed decisions and capitalise on the exciting opportunities presented by the world of SME investing.

“At Winterberg Group, we take a strategic approach to investing in SMEs, focusing on businesses with strong growth potential and a clear path to profitability”, says Fabian Kröher, Executive Director at Winterberg Group.

A record $12.8 trillion assets under management (AUM) in private equity in 2022 results in a strong competition on the buy-side across all ticket sizes. To stay ahead of the competition, modern private equity funds had to adapt by creating new value propositions targeting the sellers.

The new generation of private equity emerges more and more as a sophisticated day-to-day business partner with industry know-how and dedicated portfolio management expertise. All of this creates an unprecedented value proposition for business owners.

Flexibility

One of the main benefits of selling to a private equity firm is the flexibility they can offer in deal structures and investment horizons. Unlike strategic buyers, who may have more specific strategic goals and integration plans, private equity firms are often more flexible in how they structure deals. For example, a private equity firm may be willing to offer more favorable terms for the seller, such as allowing them to retain some equity in the company.

Quick process execution

Private equity firms are able to execute deals quickly is that they have a more streamlined decision-making process. Because private equity firms are typically smaller and less bureaucratic than strategic buyers, decisions can be made more quickly and with less red tape. This allows private equity firms to move more quickly through the deal process, from initial due diligence to negotiating and closing the transaction.

Private equity firms also tend to be more focused on the deal itself than strategic buyers. Strategic buyers may have a number of competing priorities and may be less willing to move quickly on a deal if it doesn’t fit within their broader strategic plans. Private equity firms, on the other hand are more motivated to move quickly and efficiently on a deal.

Focus on Growth

Another benefit of selling to a private equity firm is their focus on driving growth and creating value in portfolio companies. Private equity firms typically have a lot of experience in identifying and executing on growth strategies, whether that be expanding into new markets, investing in new products or improving operational efficiency. Because their goal is to generate a strong ROI for their investors, private equity firms are incentivised to help the companies in their portfolio grow and improve. For business owners looking to expand and improve their operations, this can be a big advantage over selling to a strategic buyer, who may not prioritise the same level of growth and value creation.

Retaining Management and Employees

Private equity firms may be more inclined to retain existing management and employees, particularly if they believe that the existing team can help drive growth and create value. This can be a big advantage for business owners who want to ensure that their team is taken care of after the sale. In some cases, private equity firms may even incentivise management and employees with equity or other incentives to help drive growth and create value. Strategic buyers may be more focused on integrating the acquired company into their existing operations, which can lead to more changes in management and employee structures.

Return on Investment

While both strategic buyers and private equity firms aim to generate a return on their investment, private equity firms typically have a more focused approach to value creation and may be better positioned to execute on a specific growth strategy. This can result in a higher return on investment for business owners who sell their companies to private equity firms with a re-participation stake. Private equity firms are typically very focused on generating a strong ROI for their investors, which can lead them to be more proactive and aggressive in driving growth and creating value in portfolio companies.

Maintaining company’s legacy

When a company is acquired, the new owner often has the power to make significant changes to the business. This can include changes to the company’s operations, management and culture. In some cases, this can lead to the destruction of the company’s legacy and the erosion of the brand and reputation that the business has built over time. However, private equity firms have a reputation for being more focused on preserving a company’s legacy and maintaining its culture after a takeover, compared to strategic buyers.

Private equity firms may be more focused on the long-term success of the company than on short-term gains. This means that they are often more willing to invest in the company’s infrastructure and operations, rather than making significant changes to try and achieve quick wins. This can help to preserve the company’s legacy by ensuring that the business continues to operate in the same way it has in the past, while also investing in its future growth and success.

Another factor that may contribute to private equity firms being more inclined to preserve a company’s legacy is their focus on value creation. Private equity firms typically acquire companies with the goal of generating a strong return on investment for their investors. This means that they are more focused on driving growth and creating value in the business, rather than making significant changes that could erode the company’s legacy and reputation. In many cases, preserving the company’s legacy can be a key part of the strategy for creating value, as it can help to maintain customer loyalty and brand recognition.

Finally, private equity firms may be more likely to work collaboratively with the existing management team and employees of the company, rather than imposing their own management and culture on the business. This can help to preserve the existing culture and values of the company, while also ensuring that the management team and employees remain engaged and motivated after the takeover. By retaining the existing management team and employees, private equity firms can also benefit from their knowledge and experience, which can be essential in driving growth and creating value in the business.

“Overall, there are always pros and cons when choosing between a financial or strategic investor. However, we see that the private equity paradigm indeed shifts away from a pure valuation proposition for the sellers to a more flexible, growth-driven value proposition”, says Fabian Kröher, Executive Director at Winterberg Group.

The DACH region (Germany, Austria, and Switzerland) is known for its robust economy and strong industries. One important feature of this region’s economy is the prevalence of small and medium-sized enterprises (SMEs), also known as Mittelstand. These companies are critical to the region’s economic growth, as they account for the majority of employment and GDP in the area. As a result, investing in these companies is of great importance, not only for the investors but for the region’s economy as a whole.

Mittelstand Landscape in the DACH Region

The term Mittelstand refers to small and medium-sized companies in the DACH region with revenues ranging from a few million euros to a few hundred million euros. These companies are often family-owned or managed with a long-term focus on growth and profitability. The Mittelstand landscape in the DACH region is vast, comprising over 3 million companies, and they employ around two-thirds of the workforce.

Mittelstand companies in the DACH region are known for their high-quality products, technological innovation and excellent customer service. These companies are also highly specialsed and dominate specific niche markets, which gives them a competitive advantage. For example, German Mittelstand companies are known for their engineering expertise, which allows them to provide high-tech products and services to various industries.

Challenges faced by Mittelstand companies

Despite Mittelstand’s strengths, these companies face several challenges that can hinder their growth and profitability. One significant challenge these days is access to capital, as many Mittelstand companies have limited financial resources. These companies often rely on bank loans or internal financing, which at current interest rates, can limit their ability to invest in research and development, expand operations or acquire new companies.

Another challenge is the lack of digitalisation, as many Mittelstand companies have not fully adopted digital technologies. This can limit their ability to compete with larger companies and reduce their efficiency and productivity. Additionally, many Mittelstand companies struggle with succession planning, as they are often family-owned or managed. Finding a suitable successor can be challenging, particularly if the family members are not interested in taking over the business.

Investing in Mittelstand

Investing in Mittelstand offers several benefits. Firstly, these companies are often stable and profitable and have a long-term focus, therefore resulting in high visibility on potential returns. Secondly, despite each individual company’s strength, there are usually many inefficiencies that can be solved by merging similarly-sized companies across the value chain. Thirdly, SMEs tend to be traded at a discount (so-called size discount to larger peers), therefore offering better returns with the same fundamentals.

However, investing in Mittelstand companies also comes with risks. These companies are usually highly specialised and have sophisticated products or service offerings, therefore requiring the owner’s presence and involvement in daily operations. Sometimes, when we at Winterberg look at Mittelstand targets, we can’t see the business post-acquisition without the selling shareholder. In combination with Seller’s age, this can be problematic, as it is sometimes impossible to motivate 70-year-old owners, who have been working for their family business for dozens of years, to perform at 150% of their capacity once they have cashed out. The majority of selling shareholders don’t want to be operationally involved after the sale, which raises the chicken and egg problem for us and usually results in a failed deal.

Valuation Multiples

When we talk about Mittelstand valuations, in Q1 2023, based on the processes we are involved in, we see the overall range of 4x – 8x EBIT as the basic case for Enterprise Value. With such a range, the sellers may have more than a 2x difference in the purchase price, so we thought that it would be insightful for sellers to learn which major factors influence the valuations.

Industry and Market Conditions

Specific industry and market conditions can have a significant impact on a company’s valuation multiple. Companies in high-growth industries such as technology or healthcare often have higher valuation multiples compared to companies in slow-growth industries like industrials. As with any other product, the market conditions, such as supply and demand, also affect the valuation multiples. If there are many buyers and few sellers in a specific industry, the valuation multiples may be higher.

Growth and Profitability

Small-sized companies with strong growth prospects and profitability often have higher valuation multiples. Investors are willing to pay a premium for companies with high growth potential, as they expect to earn higher returns in the future. Companies with a track record of generating strong profits and cash flows can also attract higher valuation multiples.

Size and Scale

The size and scale of a small-sized company can impact its valuation multiples. Smaller companies may have lower valuation multiples due to higher risks and uncertainty compared to larger companies. As companies grow and achieve scale, they may benefit from economies of scale, which can lead to higher profitability and cash flows, resulting in higher valuation multiples.

Business Model

A particular company’s business model also affects its valuation. Project-based revenue, high customer concentration, high supplier concentration, vulnerable value chain position, high working capital requirements and high capital intensity – these factors lower the valuation multiple as they are associated with higher risks.

Management and Leadership

The quality of management and leadership can also impact the valuation multiples of small-sized companies. We prefer to invest in companies with competent and experienced management teams, who have a track record of successfully growing and managing businesses. Companies with strong management and leadership teams that are not dependent on the selling shareholders may have higher valuation multiples due to the reduced risk of investment.

Deal Structure and Risk Sharing

Risk-sharing mechanisms in the forms of earn-outs, re-participation, vendor loans and the like, which drags the selling shareholders to participate in the company’s future usually increase the overall valuation of the company, as part of the purchase price is deferred in nature.

Country risk

While DACH is usually considered a homogenous region, it is not like this when it comes to valuations. Before Credit Suisse’s merger with UBS was announced, it was visible, that German SMEs had a discount compared to Swiss SMEs, while Austrian SMEs had a small discount on German SMEs. We are yet to see where the dynamics post-CS deal will lead the markets.

Winterberg Group investments in Mittelstand

At Winterberg, we focus on Mittelstand investments since 2017. Following successful deals in different sectors, we are on the watch for players with EBITDA in the range of 1-5 million EUR with a strong product and services portfolio, experienced management and robust market position.

“There are many specialised players within the DACH Mittelstand that contribute to addressing major problems of the future. Mittelstand’s unique features allow us not only to achieve attractive returns but also to make a positive impact on our society and environment.”

Fabian Kröher, Executive Director at Winterberg Group

How increased interest rates impact the Private Equity industry?

After an unprecedentedly long period of close-to-zero interest rates, central banks have been aggressively hiking interest rates to control inflation. This has impacted the global markets, and the private equity industry is no exception.

In general, higher interest rates result in lower returns and lower competition, which leads to lower asset prices in Private Equity. In theory therefore, this should be a zero-sum game for the investors over a long period, as increasing interest rates should be balanced off by lower multiples and visa-versa. The market corrections may however take years. In the short run therefore, increasing interest rates may have the following impact on the private equity industry:

Lower returns: Private equity firms often rely on borrowing money to finance their investments, and higher interest rates can increase the cost of borrowing. This can result in lower returns on investment, as more money is required to service the debt.

Reduced deal activity: Higher interest rates can make it more difficult for private equity firms to finance acquisitions, leading to reduced deal activity. This can lead to fewer investment opportunities and slower growth for private equity firms.

Portfolio company performance: Higher interest rates can increase the cost of debt financing for portfolio companies, which can put pressure on cash flow and profitability. This can negatively impact the overall performance of the private equity firm’s portfolio.

Decreased competition: As borrowing becomes more expensive, private equity firms may have fewer competitors, which can lead to lower valuations for assets and decreased returns on investment.

Impact on exit strategies: Higher interest rates can impact exit strategies for private equity firms, as it can be more difficult to sell assets in a high-interest-rate environment. This can result in longer holding periods and reduced returns on investment.

Who is impacted?

Strategic PE players vs. leverage-driven

The devil is in the detail. Some of the traditional Private Equity competitors noticeably struggle in the current environment.  “The key decisive factor is the source of the value-creation. We keep seeing our competitors entering deals with up to 80% leverage with adjustable rates and basically no growth plan. Obviously, they are in trouble now”, says Fabian Kröher, Executive Director at Winterberg Group.

Meanwhile, more hands-on PE players, implementing a wide range of organic and non-organic growth drivers, for instance via a buy-and-build strategy, are not expected to be negatively impacted in any significant way by the current turmoil. Key growth drivers for more hands-on Private Equity funds mostly include strong growth plans, extraction of synergies between multiple entities, access to new markets, value-add expertise in more efficient management, and others. As a result, the return rates are much less sensitive to any changes in interest rates.

Large-cap vs. Small-cap

We at Winterberg Group also see a big disparity in how the changes in interest rates differently impact larger-cap transactions vs. the smaller-sized environment.

Larger acquisition targets with an established track record have a much larger debt-carrying capacity. As a result, we saw ridiculously high multiples in the past, which were purely justified by vast debt amounts at low interest rates. Those funds also face minimum IRR thresholds, which are now becoming more and more difficult to achieve. As a result, we see funds being forced to hold onto assets much longer, due to min. return thresholds, which are not going to be realized in the event of an exit. Strong competition on the buy-side at the same time is not fully compensating for the valuation multiples correction, forcing the buy-side participants to overpay for the assets. As a result, we see less deals getting to the market at acceptable prices.

Smaller-cap Private Equity deals, in contrast, feature lower leverage in the capital stack, limiting the impact of the overall interest rate hikes on the returns. In combination with lower competition, the current market conditions create a much more buyer-friendly environment.

Shifting credit landscape (alternative credit providers vs traditional banks)

The combination of increasing regulatory standards (Basel I – IV) with very low-interest rates made the credit leverage finance business for traditional banks extremely unattractive. Especially in the lower-size segment, the transaction execution expenses on the bank’s side often exceeded the potential interest rates, they would get in return. In addition, increasing KYC requirements and strict risk policies made banks very slowly in their processes, becoming a potential bottleneck of a transaction from the Private Equity’s point of view.

All of the above created an unprecedented growth of private debt providers emerging. Indeed, the global Private Debt market has more than tripled in the last 7 years. The USPs of Private Debt providers are clear: quick execution, less strict credit policies, and high leverage amounts in exchange for a higher interest rates, compared to a traditional bank. Given the overall ultra-low interest rate environment, this seemed like an attractive trade-off for the Private Equity industry.

However, we believe that the competition between traditional banks and Private Debt providers is expected to intensify in the coming years, as Private Debt providers will have to adapt to growing delinquency rates and as a result, adapt their credit policies. At the same time, the spike in interest rates makes traditional credit leverage finance more attractive for the banks, who are expected to ramp up their deal-sourcing efforts soon. “We already see the competition between different lenders intensifying. We’ve never seen that many players proactively reaching out to us with very flexible financing solutions”, says Fabian Kröher, Executive Director at Winterberg Group.

Moreover, with the increasing difficulties to generate attractive returns in a high interest environment, Private Equity funds will need to put a larger emphasis on the overall cost of capital, which shall favour the traditional banks.

When we at Winterberg Group acquire Mittelstand companies in the DACH region, we encourage the selling shareholders to re-participate with a minority stake in the company. Why? The answer is simple – on the one hand, we want to share a portion of our risks. On the other hand, for owners, it’s usually a good way to invest part of the proceeds from a sale and continue to build up their wealth.

From our experience, ways of re-participation may vary on a case-by-case basis, but are generally one or another form of the following three mechanics:

Re-investment: The business owner can re-invest some or all of the proceeds from the sale of the company into the acquiring company (AcquiCo or the Fund). This can be done through investing cash proceeds from a sale in a new fund that will hold the acquiring company.

Equity rollover: In an equity rollover or in-kind contribution to the Fund, the business owner exchanges their ownership in the acquired company for ownership in the acquiring company. This allows the owner to maintain their stake in the business and benefit from future growth.

Earn-out: An earn-out is a contractual arrangement where a portion of the purchase price is contingent on the future performance of the acquired company. One way of looking at this, is that a part of a purchase price is simply deferred, while others may consider it as an investment mechanism. Ultimately, the seller receives less cash at closing with an opportunity to receive more if the business performs well. Technically it is equal to re-investing cash or company shares in the Fund.

In certain cases, we offer a combination of the above options which helps us and the selling shareholders to achieve a mutually beneficial result. Not all deals are created equal, so it’s important for us that the business owners carefully consider the re-participation mechanism that they’ve been offered.

Typical Seller’s perspective on re-participation and earn-outs

Typically, the seller will be open to a reasonable re-participation and/or an earn-out, provided that key aspects are well and transparently documented in the SPA. However, the most frequent questions are the following:

Q: Are the milestone targets reasonably achievable in a reasonable time period?

A: We usually base our KPIs based on the Seller’s business plan and/or historical performance of the business. Therefore, the Sellers are definitely capable of evaluating the possibility of a business plan achievement.

Q: How can the seller make sure the buyer doesn’t operate the business in a way that minimise or eliminates the earnout payments?

A: It has never been and never will be our intent to undermine business performance in any possible way. That’s not wise to shoot your own business in the leg, as the business needs to have a compelling story for the next buyer. If the concern is strong, we usually provide a performance metric range, so that the seller receives a portion of the deferred payment even in cases when the company performs worse than planned. In addition to that, re-participating sellers usually have customary board representation rights and are participating in the operations, so they have enough leverage to see the true performance.

Q: Is the amount of the potential deferred payments significant enough to delay the seller getting all cash up front?

A: All deals are different, and all sellers have different circumstances and plans. In deals we typically do, the earn-out and re-participation components are within a range of 10 to 30% of the purchase price.

Why is it important for us that the selling shareholders re-participate?

Overall, the re-participation of selling shareholders is usually beneficial to both us and the selling shareholders, as it helps to drive growth and profitability for the company.

First off, re-participation aligns interests: When selling shareholders re-participate in the company, they have a stake in the ongoing success of the business. This aligns their interests with those of the financial investor and management team.

Secondly, and this is critical for Mittelstand, expertise and experience: The selling shareholders, who are usually owning the business for generations, often have significant expertise and experience in the industry and with the company. This is valuable to the financial investor and management team as they work to grow the business.

Another reason is confidence in the business: If the selling shareholders are willing to re-participate in the company, it is a positive signal to us that they have confidence in the business and its future prospects.

How does the common market practice look in 2023?

In terms of the DACH market, some agencies regularly solicit feedback from a wide number of M&A advisory firms on their market outlook. One of the recent reports by Firmex, for example, suggests that M&A advisors reported that deal volume remains constant with half of the respondents forecasting deal volume in the coming three months to increase. At the same time, over half of the M&A firms questioned observed a growing gap between prices asked by sellers and prices buyers are willing to pay. The gap in value expectation is being increasingly filled by special mechanisms to narrow the gap in price expectations, like re-investment and earn-out mechanisms. Four out of ten M&A advisors said that earn-outs have become much more common. That certainly resonates with our own experience here and we see this as a necessary instrument in times of uncertainty which we definitely have today.

Water is essential for human survival, and ensuring a secure and reliable water supply is of paramount importance. In Germany, the Water Security Law (Wassersicherstellungsgesetz) aims to provide emergency water supply to cities in times of crisis, ensuring the population’s uninterrupted access to clean drinking water. The law has been designed to provide a framework for local authorities to ensure that water supply can be maintained even in the face of extreme weather events, natural disasters, or other crises.

The Water Security Law stipulates that the Federal Government is responsible for equipping cities with necessary machines, devices or pumps to ensure the uninterrupted supply of water to the population. The law emphasizes the need to provide one pump per approximately 1,500 inhabitants. This guideline is based on the assumption that a single pump can supply water to about 3,000-5,000 people, depending on the pump’s capacity and the distribution network’s design.

The law’s implementation is the responsibility of the local authorities, who must develop and maintain emergency water supply plans to ensure that the population’s water needs are met during a crisis.

The Water Security Law is just one part of the broader framework that ensures water supply security in Germany. The country has a robust water management system, which includes the Water Resources Act (Wasserhaushaltsgesetz), the Drinking Water Ordinance (Trinkwasserverordnung), and the Federal Water Act (Wasserhaushaltsgesetz). These laws regulate water use, protect water resources and ensure drinking water meets the highest standards of quality.

In addition to legal frameworks, Germany also has a well-established water infrastructure that provides reliable access to drinking water to its population. The country’s water supply system is decentralised, with more than 6,000 water supply companies managing the water distribution network. This decentralised system ensures that the water supply is less vulnerable to disruptions than centralised systems.

Despite the robust legal framework and well-established infrastructure, Germany is not immune to water crises. In recent years, the country has faced extreme weather events, such as droughts and floods.

Recent droughts in Germany: when there’s not enough water, it does not necessarily mean there’s not enough drinking water.

The hot and dry years in the 1990s, and particularly the year 2003 have shown that Germany can be hit by low water and drought, despite being in the temperate climate zone. In Germany this exceptionally long dry and hot phase has led amongst other things to increased risk of forest fires, losses in the agricultural sector, restrictions on inland waterway traffic and on the operating times of thermal, hydroelectric and nuclear power plants. The reinsurance company Munich Re estimated the costs of the heat wave of 2003 in Germany at more than 1.2 billion EUR. Others report an agro-economic impact of this drought event for Germany of 1.5 billion EUR, and 15 billion EUR for all of Europe. However, the supply of drinking water was not threatened during 2003.

The period 2014-2018 was a dry period in large parts of Europe, the worst multi-year soil moisture drought during the last 253 years (1766-2018) in especially Central Europe. In Germany, an exceptionally hot summer happened in 2015, when almost 75% of the area of Germany was under at least moderate drought in July. During August 2015, the total area under drought decreased, but the areas of extreme and exceptional drought conditions increased to 22% and 5%, respectively.

The degree to which a region is hit by changes in runoff depends strongly on the size of the change and on the initial situation. Especially regions that presently have an unfavorable water balance and low runoff, such as e.g. the central regions of Eastern Germany, can be strongly impacted by climate change. In these regions, the shift of precipitation from summer to winter leads to further decreases in summer runoff, when the situation has already been difficult in arid years and causes further water shortages. Even if the results vary between climate models, there is considerable evidence that climate change will increase the risk of arid periods and droughts.

Flood and drought conditions in five large river basins in Germany (covering 90% of the German territory) were estimated from a large number of regional climate model projections. The results for 2061-2100 (compared with 1961-2000) show that many German rivers may experience more frequent occurrences of current 50-year droughts. During the summer there will be much less water available than at present. Between 1990 and 2080 the runoff in summer, depending on the climate model used and the emission scenario considered, will show a decrease of up to 43%. Rivers with a markedly Alpine runoff regime will also be affected by other components, such as accelerated melting of glaciers or permafrost soils and changes in the stability and thickness of snow cover.

However, since Germany’s drinking-water supplies are obtained largely from locally available groundwater resources and only partly via bank filtration or from surface waters (for example, reservoirs), no fundamental problems in drinking-water supplies are expected even under changed climatic conditions. On the other hand, regional scarcities might occur in areas that suffer extensive periods of drought.

Floods: when too much water puts availability of drinking water in danger.

On the night of July 14-15, 2021 the floods hit the Ahr Valley in southwestern Germany. Within a day, the floods turned many people’s lives upside down. Heavy rains transformed small rivulets and streams in the states of Rhineland-Palatinate and North Rhine-Westphalia into torrents. More than 180 people lost their lives and around 17,000 people lost all their possessions. At least 60,000 houses and 28,000 companies were destroyed altogether, causing damages of at least 33 billion EUR.

Last year, Germany marked 20 years since Elbe floods. In 2002, dozens were killed, hundreds injured and tens of thousands left homeless when torrential rains caused the Elbe and other rivers in eastern Germany to burst their banks in one of Europe’s worst natural disasters. In August 2002 a heavy rainfall in Central Europe caused record-breaking floods in the Czech Republic, Austria and Germany. One of the first cities affected was Passau, in Bavaria. The Danube reached 10.8 meters, its highest level since 1954. On August 17, the Elbe and Weisseritz rivers flooded parts of Dresden’s historic city center affecting the Zwinger Palace. In 2002, the floods caused major damage across Germany. It left behind destroyed roads, bridges and railroad tracks, as here near Riesa. Houses and dikes were damaged, and harvests were ruined. The Elbe flood of 2002 is still considered the most expensive natural disaster in German history. The total damage amounted to 11.6 billion EUR.

Flooding can lead to contamination of water sources, damage to water infrastructure and disruption of water supply networks. One of the primary ways that floods can impact drinking water availability is through the contamination of water sources. As rivers and lakes overflow, the pollutants and debris enter the water. This includes sewage, chemicals and other hazardous materials, which can contaminate the water and make it unsafe for drinking. Another way that floods can impact drinking water availability is through damage to water infrastructure. Floods can cause significant damage to water treatment plants, water supply networks and water storage facilities. This damage can result in disruptions to the water supply and can take time to repair, leaving people without access to clean drinking water.

The Water Security Law, along with other water management laws and regulations, aims to address these challenges and ensure that the population’s uninterrupted access to clean drinking water is ensured even in times of crisis.

Emergency water supply market: an interesting niche

The emergency water supply market can essentially be split into two large segments: (1) emergency water wells and (2) emergency water equipment.

The market for emergency water wells in Germany is a relatively small but important sector of the water supply industry. Emergency water wells are a critical source of water during times of crisis, when traditional water sources may be unavailable or contaminated. In Germany, emergency water wells are typically drilled into underground aquifers or other water-bearing rock formations. These wells can be equipped with pumps and filters to extract and treat water for drinking and other purposes. Emergency water wells can vary in size, depth and capacity, depending on the specific needs of the community or region they serve. Despite the relatively small size of the market, the demand for emergency water wells in Germany is expected to grow in the coming years. The Water Security Law as well as increasing frequency of extreme weather events and the need to ensure a reliable and safe water supply during emergencies drives the emergency water wells market. The market consists of a limited number of companies specializing in the design, drilling and maintenance of these wells.

As for the equipment part, there are various types of emergency water pumps and filters available, including portable pumps, submersible pumps and large-scale water pumps. These pumps are designed to be used in different situations and can range in capacity from small pumps that can deliver a few hundred liters per hour to large pumps that can deliver thousands of liters per minute. The pump and compressors sector belongs to the most important areas of mechanical engineering in Germany and is estimated at ca. 12 billion EUR in 2022. The market consists of a number of large players, as well as from the long tail of smaller producers of equipment, engineering and value-add distributor companies.

Winterberg Group in the context of emergency water supply market

Following successful execution of the Buy & Build strategy in water and wastewater treatment market in recent years, Winterberg Group aims to create a holding in the emergency water supply market by consolidating niche Mittelstand companies in this sector. We are on the watch for players with EBITDA in the range of 1-5 million EUR with strong product and services portfolio, experienced management and robust market position.

“The German Mittelstands boasts many highly specialised players which in some way contribute to battle the water crisis. We would like to invest into this macro trend to not only make attractive returns, but also to help countering the effects of this crisis on our country and our lives.”

Fabian Kröher, Executive Director at Winterberg Group