Frankfurt Goetz Hertz-Eichenrode, head of the medium-sized investor Hannover Finanz, is becoming more cautious when it comes to new investments in view of the Ukraine war, inflation and rising interest rates. Sales and IPOs of companies in the portfolio would also become more difficult. “I think the mood in the entire investment industry will continue to deteriorate in the second half of the year,” says the manager in an interview with the Handelsblatt.
Hannover Finanz is an exception in the investment sector, which is characterized by Anglo-Saxon private equity funds. The house has been active in Germany for 40 years, well-known brands such as Rossmann or Fielmann as well as Aixtron have grown with the capital of the Hanoverians. Last year the company achieved a record result of more than 100 million euros.
The company sees itself as a partner for medium-sized companies – and sees itself at an advantage with family businesses. “We are owner-managed ourselves in the second generation, that’s our DNA,” says Hertz-Eichenrode. Since it was founded, Hannover Finanz has completed more than 250 projects and invested more than two billion euros.
Read the full interview here
Mr. Hertz-Eichenrode, Hannover Finanz has been active in the investment business for many decades. How does the “perfect storm” of Ukraine war, rising interest rates and supply chain problems hit your companies?
With the outbreak of the Ukraine war, we immediately had a matrix created to see where our portfolio companies are exposed. And – as we actually expected – there were hardly any commitments in Russia, only isolated production facilities in Ukraine and IT employees there. Rather, we are concerned about dependency on energy supplies from Russia.
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This dependency also drives inflation. How do the portfolio companies feel about this?
Of course, this has an impact on our companies. But rising wages and prices were already an issue before the Ukraine war, and now this crisis is accelerating the fire. As far as dependency on Russia is concerned, Germany is certainly in a special situation in Europe.
Have you now become more cautious with your investments?
Yes, yes, especially in industrial companies, including automotive suppliers and retailers. This is particularly noticeable in mergers and acquisitions, the so-called M&A processes. We have now experienced three situations where sales processes that had already started were stopped.
Vita Götz Hertz-Eichenrode
I think that the plans for the coming months had to be revised downwards. The ideas about buying and selling prices are currently very different. Incidentally, these were manufacturing industrial companies, including a plant manufacturer.
What is the current pipeline? How many deals are you looking at?
We are in due diligence with three companies, i.e. the detailed economic examination. We are looking for companies that are able to push through higher prices on the market. This is the case, for example, in medical technology and also with selected consumer goods manufacturers.
Do you still expect to graduate this year?
Yes, that is our goal. But overall we will invest significantly less capital in new investments in 2022, that is very clear. Last year we invested EUR 115 million, which is a record. This year we will probably end up with around 60 million euros.
How big are the assets under management?
Around 700 million euros, of which 200 million are free funds for new investments. On average, we invest around EUR 20 million, and the average holding period is eight years.
Create platforms for consolidation with venture capital
Is inventory maintenance becoming more important now?
You could say that the buy-and-build strategy plays a major role, i.e. investments in growth and the acquisition of suitable companies. In this way, platforms can be created for individual sectors. This applies, for example, to the companies for technical building management in which we hold shares.
With Finvia you have also taken over a fintech company. That was not a focus of Hannover Finanz before.
Yes, I would say. We are already pursuing a sector strategy here. We are known as a generalist with a broad industry focus, but we also want to focus more on new technologies. Software, medical technology and high-tech companies now play a major role for us.
What are your plans for Finvia?
This is classic growth financing. Here, holistic investment advice is to be transformed into the digital age. The focus is on private individuals with assets between 2.5 and ten million euros. In addition to classic investments, alternative assets such as private equity and private debt are a strength. We have invested a two-digit million amount in Finvia.
Can you imagine further investments in the fintech sector?
We are certainly increasingly active in this segment and also have the relevant expertise on the Advisory Board, including with the founder and former CEO of Finleap, Ramin Niroumand. In general, it can be said that the declining valuations of start-ups are creating new opportunities for investments there.
What do start-ups have to bring with them to be interesting for Hannover Finanz?
You should already be profitable. And we’re not looking for potential unicorns with a billion valuation, but rather valuations of maybe 40 or 50 million euros.
We talked about investments, but what about exits?
I think the mood in the entire private equity industry will continue to deteriorate in the second half of the year. Accordingly, sales of portfolio companies are also becoming more difficult. I think we will also see fewer investments by companies, which will put additional strain on the assessment of the situation.
Are IPOs an issue?
Rather not. We have many small and medium-sized companies in our portfolio, so an IPO would not make sense because the liquidity after the initial public offering (IPO) is too low. There is no research for the companies, they simply go under and are hardly noticed.
What about sales to other financial investors?
We do very few such secondaries. We rely on family-run medium-sized companies. You see, we are owner-managed in the second generation ourselves, that is our DNA.
Where is the famous wave of deals from the succession problem?
This has been increasing since 2018, since then we had seen around 1000 deals in Germany that lacked an internal successor. That was around 40 percent of the companies that came into question for us. We have invested in eleven companies since 2018, seven of which were succession plans.
Why are entrepreneurs selling?
Well, the complexity is getting bigger and bigger, at the same time the pressure to digitize is growing. Some entrepreneurs also say that after the corona crisis and the Ukraine war, I just don’t feel like continuing. The world is turning faster and faster, so many companies want a financial partner to support them. There are also company directors who are in their mid-50s and then want to put some of their assets behind the firewall, that’s understandable.
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What returns are currently achievable with private equity?
We at Hannover Finanz have averaged around twelve percent net for over 40 years. We also have a kind of basic income through dividends and interest income, so we’re not just dependent on the deals. That is a base that accounts for at least 25 million euros a year. That’s why we can distribute to our investors even in years without an exit. And when interest rates rise, minority holdings become more attractive again.
Do you mainly make majority holdings?
Yes, often through an owner buyout, where the owner remains a minority or even significantly involved and can continue to work for his company.
“We pay a lot of attention to discretion”
Where do you see your strengths in competition with other private equity funds?
We often get exclusive deals because we value discretion. That’s why we’ve been in the market for 40 years, and today we have 35 investments in our portfolio. We are actually a hybrid between family office and private equity.
Sustainability is also a top priority in the private equity industry. What are you doing for it?
We’ve been climate-neutral for a year – but our CO2 footprint is also small, so a few business trips make a difference, we don’t have a classic production facility like an iron foundry, for example. And we have a stake in the company First Climate, which develops projects – especially for the Third World – to reduce CO2.
What about investments in renewable energies?
We’re rather reluctant there, we shy away from regulation. But we love peripheral areas, such as components for wind, water and solar power systems. But we are involved with Excon, for example, who have developed a tool for introducing, monitoring and administering the ESG balance sheet, which companies can use to check how far they have come in implementing the ESG criteria.
At Hannover Finanz there are apparently still weaknesses when it comes to diversity – there are only two managers in management positions for the operative business.
That’s only partly true, because we have more women in management positions in the back office. We are 34 employees in total and almost half of them are women. You also have to realize that top talent is quickly poached away in our industry. But that applies more to Berlin and Frankfurt. We therefore have flexible models – one manager works from Frankfurt, for example – and we want to get more women on board in the future.
Who are your financiers and what has management brought in?
Our group of investors consists of insurers such as Hannover Re or Signal Iduna, but also from church and professional pension funds. The management contributed around 20 million euros.
What do you expect from the federal government?
I think it would be good if the status quo was preserved, i.e. if there were no worse general conditions. The industry must continue to work on improving its image in order to shed the old locust image once and for all. But a lot has already happened there, and today many people understand the private equity business model very well. The 50-year-old entrepreneur now knows the advantages of venture capital.
ZFinally, a personal question: What do you do differently than your father used to do?
He must have been a manager from the old school, a patriarch. He was looked at when making investment decisions and then thumbs down or thumbs up. This is of course an exaggeration. Today the focus is more on team decisions. The management style is much more cooperative. That also fits in today’s world, especially since the managers invest their own money.
What are the biggest challenges in the coming months?
It will certainly be crucial to continue to attract good staff. And of course the companies have to master and survive this “perfect storm” economically. So far, none of our companies are in distress and some – such as the bicycle manufacturer Simplon – are even benefiting from the crisis. Since then, sales have doubled. I myself also take an e-bike to work, that’s twelve kilometers every day.
Mr. Hertz-Eichenrode, thank you very much for the interview.
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