Beneath the headlines: German private equity

Introduction

Germany is Europe’s largest economy, but its private equity market has long underperformed its potential. Macro headwinds, sector concentration, and a historically higher loss ratio have left German private equity trailing returns elsewhere in Europe.

The case for revisiting the market rests on three structural changes:

1. Germany’s new coalition has committed €500 billion to infrastructure, defense, and industrial modernization, the largest fiscal package in the country’s post-war history. The later waves of spending are likely to reach Capex areas that matter for private equity.
2. European NATO members have pledged to raise defense spending toward 5% of GDP by 2035, creating a multiyear tailwind for German prime contractors and their supply chains.
3. LPs are increasingly looking to rebalance their portfolios and grow their European exposure. As Europe’s second largest private equity market, Germany stands to benefit.

That said, the opportunity in Germany private equity sits in specific pockets rather than in headline numbers. In this paper, we show why Germany rewards selectivity.

A decade of relative underperformance

Germany ranks second only to the UK in European private equity deployment. Between 2015 and 2023, roughly 15% of European buyout capital was invested in German-headquartered companies (Figure 1). For LPs, the scale of that deployment is intuitive: Germany is Europe’s largest economy, with a deep industrial base and the Mittelstand of family- and founder-owned businesses that has long offered opportunities for primary sourcing and buy-and-build.

Yet strong deployment has not translated into comparable performance. As shown in Figure 2, German private equity has modestly trailed regional peers on gross TVM. The gap is modest in isolation but meaningful on a risk-adjusted basis, given German deals’ higher loss ratio compared with most regional peers

_{Note: This covers the full UK buyout market (including large-cap) and so differs from the UK SMID returns cited in our recent paper UK private equity: How scarcity, succession and specialism drive outperformance. UK SMID remains an attractive segment, but the weight of large-cap deals in the broader UK market brings the aggregate UK number in this chart below the SMID figure.}

Several factors explain weaker returns. Exposure to cyclical industrial end-markets left portfolios particularly vulnerable to energy shocks, supply-chain disruption, and the slower-than-expected EV transition in the German automotive sector. A more regulated healthcare market, relative to the Nordics or the UK, has also introduced binary legislative risk. Meanwhile, German consumers have proved structurally more cautious than their peers, with high savings rates and muted real wage
growth compressing consumer private equity outcomes.

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