Professionalism is increasing among players involved in buyout deals in Germany, as the ecosystem surrounding companies looking to de-risk liabilities grows amid an economic transformation.
Magnus Schmagold, managing director of buyout firm Funding Solution Deutschland, told IPE that legal advisers now have a clearer picture of the risks associated with transactions, as well as operational procedures and governance standards.
“Professionals look into details, and there is much more attention to compliance and governance now, which is a great development for the market,” he added.
Advisers understand buyout deals “in much more granularity”, considering that risks associated with the transactions last longer than the first 10 years of managing a pension corporation (Rentnergesellschaften), a vehicle used in Germany to offload liabilities, he said.
At the same time, the ecosystem around buyouts is growing.
“It is coming more and more to our attention that, for example, reinsurers intend to assume more risks, longevity, actuarial inflation or investment risks,” Schmagold said.
WTW, which entered the German buyout market last year by partnering with Munich Re on a reinsurance solution, expects professionalisation to strengthen further, alongside increasing momentum in the buyout and risk-transfer market.
“We expect an increasing number of transactions, involving significantly higher volumes. We expect transactions in the near future to be driven purely by broader pension de-risking considerations,” said Johannes Heiniz, managing director, retirement, at WTW Germany.
Buyout offerings from new providers and market participants taking over asset management and hedging of biometric risks will continue to evolve.
“We are observing intensified interest in the German buyout market from established foreign buyout and buy-in providers,” Heiniz said.
Overall, the level of education around deals “is accelerating quickly”, and with it, the number of corporates potentially considering a buyout, said Moritz Jonas, head of institutional client specialists Germany at Schroders.
“We are reaching out to companies, responding that they want to learn more about the German buyout market even if they don’t have a dedicated project launched internally yet,” he said.
In terms of size, deals of more than €1bn remain an exception.
“There is a lot of activity below €100m, and we continue to see deals above €100m proceeding,” Jonas continued.
Buyout firm Deutsche Betriebsrenten Holding (DBR Holding) is involved in buyout projects with larger volumes compared with the amount of liabilities taken over from UBS last year, said managing director Dirk Popielas.
Since then, DBR Holding has executed further transactions.
“These are event-driven, for example by refinancing, a joint venture, an M&A. For German corporates, transactions are a matter of time and size, specific projects that fit in the strategic business plan,” he added.
Economic transition creates de-risking opportunities
Record-high funding ratios are leading to a new strategic phase for pension management.
On top of that, the historic transition of the German economy is bringing management changes, changing business models and new corporate requirements, offering further opportunities to de-risk liabilities.
“Companies want to reduce costs, streamline the capital structure of the balance sheet to align it to the new business models and structure of the company, Popielas said.
Pension de-risking transfers through buyouts are long-term projects, taking two or three years to find the right structure and timing, and require extensive analysis and consulting, he added.
With consistent positive performance from invested assets and rising interest rates, buyouts could often be financed without the need for additional capital, WTW’s Heiniz noted.
Schroders is involved in a few buyout processes currently, while Funding Solution has closed deals worth more than €100m in the first part of this year, including a follow-up transaction with an existing client and the takeover of pensions from Rabobank.
“The addressable market for pension Buy-Outs is realistically €40-60bn over the next 7-10 years, with prime candidates being companies with solid funding and general de-risking policies,” Schmagold said.
