The Strong Value Compass of Family Capital

The German “Mittelstand” is often referred to as the backbone of the German economy. And rightly so, because it is above all mid-sized family businesses, including many “hidden champions” that characterize our national economy, which is envied around the globe: the 90% of German companies that are family-owned account for nearly 60% of all private sector employees and for more than half of the country’s total turnover. There are up to 1,500 proud world market leaders in Germany. One of the secrets to the success of German family businesses is certainly their strong value system, the foundation of which is based on a long-term approach and sustainability. It includes entrepreneurial ambition, farsighted management and forward-looking planning, as well as the desire to preserve one’s life's work for future generations. The focus is not on short-lived growth and quick profits, but rather on the enduring existence of the company for many years to come. The companies typically also have grown deep roots in their local region and are focused on tradition, employee welfare and social commitment, which all continue to play an important role even in times of global expansion. In addition, contrary to popular belief, it is family businesses in particular that invest heavily in innovation and cutting-edge business models, because they understand that in order to maintain their market-leading position, they must continually evolve and grow.

But anyone who wants to be successful in the market and prevail against numerous new global risks needs capital and know-how. Virtually all family businesses today have to tackle strategic challenges proactively: digitalization, expansion and internationalization, talent management and further qualification, product development, diversification and brand development. In this environment today, investment firms are more in demand and more respected as partners for the realization of medium-sized companies’ succession and growth plans than they were a few years ago. Family businesses, however, are rightly very selective in who they team up with and do not need to sell at any cost, even in the face of record valuations. The chemistry must be right, because for many business owners their companies represent an enormous emotional value for their family and the local community, which could be endangered by a faceless financial shareholder. Since selling to a strategic investor is in many cases also not an option because of the likely loss of independence, many company owners are looking for a partner who has a similar understanding of sustainability and responsibility and wants to achieve future viability for the company just as much as they do.

Dialogue and Understanding

Family offices have long been important capital providers to traditional investment funds, alongside institutional investors. They have also become increasingly professionalized and have started investing into German businesses directly for a number of years. For them, direct investments in fact reflect their own family ethos, which often includes an entrepreneurial spirit and a strong commitment to their shared family assets.

In Germany, there are now roughly 25 large family offices, who are as professionally organized, resourced, and active as more conventional investment firms in the region. As a general rule, their family capital has a very entrepreneurial and value-oriented background and can be invested in the long term without the typical pressure for driving returns in a certain timeframe. The key deciding factor for entrepreneurs when choosing family offices as their capital partner is that families themselves understand other families, entrepreneurs understand other entrepreneurs. Family offices provide the companies a balanced partnership of equals and understand the benefits and challenges of running an enterprise.

 

Capital and Partnership

The Brenninkmeijer family, whose origins go back to the middle of the nineteenth century, has been investing in entrepreneurial businesses for almost 20 years. Their COFRA Holding includes the textile company C&A, the real estate manager Redevco, Anthos Fund & Asset Management and Bregal Investments, which in turn spans several investment firms in both Europe and North America. Bregal Unternehmerkapital, launched in 2015, focuses on investments in medium-sized companies in German-speaking countries.

The German arm of the family investor currently manages around 2.5 billion euros (assets under management), of which 1.2 billion euros are available for new investments. With its now second fund, Bregal Unternehmerkapital has developed into one of the most active mid-market investors in the DACH region. Additionally, around 80% of the firm’s investments have been so-called primaries that were acquired directly from the companies’ owners. These entrepreneurs decided to partner with Bregal Unternehmerkapital due to the firm’s strong value system as part of a family business that has grown over generations, its ability to make complex, long-term and tailor-made investments, as well as the strategic know-how and expertise of the investment team.

In addition to patient capital that is immune to fluctuations in the financial market, Bregal offers high commercial and ethical standards, an experienced team with proven value creation expertise and privileged access to an international network of over 1,900 managers and entrepreneurs. In initial discussions, Bregal is therefore able to move the dialogue away from just price and process negotiations, and towards an open discussion about how Bregal can help companies to transform and grow and how to protect them for future generations. Bregal also takes a flexible approach regarding investment structure and can find the ideal solution for a diverse range of scenarios – from the acquisition of majority or minority holdings to pure equity funding or the use of debt instruments. Bregal has come across a number of situations where companies have initially started minority sale processes but, as the process developed, became more open to a majority transaction, as founders better understood Bregal’s motivations and the envisaged growth plans.

A Common Goal

Bregal Unternehmerkapital only commits to an investment if there is an open dialogue with the owners from the outset, leading to a shared understanding of the value each party can contribute. The management team plays a central role here: all current executives invest as well, therefore remaining or becoming shareholders along with Bregal and its managers, who are also invested in the fund, thereby further strengthening their commitment and connection to the business. With patient capital, entrepreneurial expertise and a partnership approach, Bregal can thus focus on the success of its portfolio companies and help them generate sustainable value – very much in the spirit of the Brenninkmeijer family ethos. Private equity capital and patient family capital in particular can therefore significantly increase the prospects of a company’s success and secure its long-term viability. Professional family offices are here to stay and will continue to shape the investment landscape with their strong values, structures and approach. With this issue, the Financial Yearbook takes account of their growing importance in the German market and introduces a new category of market participants for the first time.

Source: FYB Financial Yearbook Germany
Click here to read the article on www.fyb.de (german version only)