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Mittelstand Financing - Latest 2014 Report

How do Mittelstand companies obtain the financing so important for the long-term success of their businesses? Ebner Stolz and Wolff & Häcker Finanzconsulting AG weigh in on the issue in their 2014 report.

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.

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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 (michael.euch­ner@eb­ner­stolz.de).

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