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Comment: Germany’s relationship with private equity takes a turn for the worse


Germany’s relationship with the private equity industry has long been an uneasy one, even before Social Democrat minister Franz Müntefering famously described private equity firms as

Germany’s relationship with the private equity industry has long been an uneasy one, even before Social Democrat minister Franz Müntefering famously described private equity firms as ‘locusts’ in 2005, but the country’s business leaders fear it is about to get worse.

A draft law that would allows the German government to nationalise banks against the wishes of their shareholders is being debated in parliament. Notably it would allow the government to take control of the stricken Hypo Real Estate, which remains in deep trouble despite having already received some EUR102bn in state loans and guarantees.

The legislation, which would allow the state to nationalise banks as a ‘last resort’, could become law by April. Germany’s finance minister, Peer Steinbrück, has already indicated that the bill is targeted at Hypo Real Estate, which is 24 per cent owned by consortium consisting of two private equity firms, J.C. Flowers and Grove International Partners, along with Japan’s Shinsei Bank, which is partly owned by Flowers.

So far the German government has failed to reach agreement on a voluntary sale of the consortium’s stake, which it acquired last June for around EUR1.1bn, or EUR22.50 a share. The Flowers consortium is reported to be holding out for EUR10 a share, but under the planned legislation the government could pay as little as EUR1. The company’s stock closed at EUR0.66 on Friday.

The draft law is controversial in Germany because of the country’s troubled history, including the Nazi seizure of Jewish property in the 1930s and East Germany’s confiscation of private businesses after World War II. But business leaders say that in addition, it will make foreign investors wary of investing in the country amid the worst recession in six decades.

Nevertheless, it seems that one way or another, the state will take control over Hypo Real Estate and it seems unlikely that the private equity consortium will come out with anything but a massive loss. Flowers has already given up on Germany; the firm closed its Hamburg office earlier this month, saying the current market conditions ‘would not offer feasible investment opportunities’.

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