The driving force in the German economy is the Mittelstand, or family-owned, small to midsize companies. The long-term success of these businesses depends on securing solid financing. But how exactly do Mittelstand companies obtain financing? What are the current trends and challenges? What are the unique features of Germany's Mittelstand companies? Ebner Stolz and Wolff & Häcker Finanzconsulting AG recently published a report addressing these questions.
In recent years, Germany's Mittelstand companies have further cemented their position and raised their profile. Strong foreign demand for German products coupled with very favorable financing terms for companies with good credit ratings have contributed to the further growth of Mittelstand companies, increased their financial stability, filled their coffers with cash, and improved their equity ratios. In short, the situation is positive for these small and midsize family-owned companies.
In terms of the capital markets, however, the report's results point to disappointing performance for Mittelstand companies: high expectations for Mittelstand bond market segments have not been fulfilled, and the stock market also remains largely untapped as a source of financing, despite its outstanding performance.
Ultimately, it can be said that Mittelstand companies currently have little trouble obtaining capital in the short term. Around half of the companies surveyed are planning to incur additional capital expenditures in view of low interest rates. For the most part, they obtain their financing in the form of bank loans, factoring and leasing, as well as shareholder loans. Moreover, in recent years Mittelstand companies have bolstered their equity base by retaining earnings and obtaining additional shareholder loans.
Alternative forms of financing, such as profit-sharing rights (Genussrechte) or bonds, are insignificant in comparison. Accordingly, managers rarely look into financing alternatives. In addition, they harbor considerable reservations about private equity. This financing option is often associated with heavy pressure to show returns, a focus on optimizing short-term results, and the danger that companies will be broken up. Strategic benefits like synergy effects, knowledge gain, and streamlined access to qualified employees, or establishing succession plans, are hardly taken advantage of.
Furthermore, these companies expect today's stable and favorable interest rate levels to be maintained. Some even expect interest rates to drop further. In other words: the Mittelstand is operating in a comfortable business environment.
Nonetheless, these companies should not rest on their laurels. Attention should be paid to the possibility of interest rates jumping sharply in the next five years. In this context, measures must be taken to secure current low interest rates for the long term, for example, by taking advantage of long-maturity options for corporate financing. Additionally, Mittelstand companies should revisit their investment strategies on an ongoing basis and consider diversifying their financing risks. Current conditions are potentially very good for an initial foray onto the capital market – particularly for large Mittelstand companies.
Moreover, the robust economy could be leveraged to increase equity ratios – and thus additional opportunities for growth – through outside capital.
Despite the excellent capital market conditions at the moment, we believe the key is to always stay on the ball. After all, in the next five to ten years, financing for Mittelstand companies will change in many ways. They will face opportunities as well as difficulties and risks that cannot be addressed sufficiently at this time. Due to globalization and the high proportion of Mittelstand company sales attributable to exports, international financial and capital markets will become more important. And, because of their excellent reputation, Germany's Mittelstand companies are considered a very promising investment target.
The fact remains that Mittelstand companies need to carefully monitor financing conditions. New developments must be analyzed and the response tailored to each company's situation. We would be happy to help you in this regard by analyzing your capital structure and developing suitable financing plans, implementing structured financing, securing financing in difficult business situations, assisting your company with seeking out and raising capital, optimizing internal financing (particularly working capital) as well as structuring funds (including the prospectus) and negotiating underwriting agreements and acquisition loan and collateral agreements.
The report can be requested from Michael Euchner (firstname.lastname@example.org).