InterviewRené Obermann and Max Fowinkel, Warburg Pincus

"We can barely keep up with the workload."

Warburg Pincus is currently in the process of raising capital for a new buyout fund. The targeted $16 billion is expected to be easily achieved. It provides additional 'dry powder' for the financial investor's two Germany heads, René Obermann and Max Fowinkel.

"We can barely keep up with the workload."

Mr. Obermann, value growth is your goal in business development. However, when looking at your portfolio, it's noticeable that the value of McMakler halved in the last financing round. What do you have to say about this?

Obermann: The company itself is well positioned and has even increased its brand awareness during this difficult phase. The real estate market has plummeted by 80% or more overall. The companies are in the midst of a rough patch and need to adjust accordingly: cut costs and take measures to weather this time successfully.

Recently, exit strategies where financial investors initially open their investments to the public have become popular. If the stock price then goes south, they immediately go private again. Is this good for the IPO climate?

Obermann: The stock market environment is currently more challenging than it was two years ago. But Warburg Pincus is fundamentally oriented towards the long term.

Fowinkel: As for take-privates, we are very actively involved in this. We are one of the companies that have made the most take-privates in Europe in recent years, including relatively large transactions like The AA, the British equivalent of ADAC, the reinsurer Somers Re, the security service provider G4S, or Inmarsat, the satellite communication provider, which is worth 6 billion euros. It's fundamentally about investing in companies and initiating changes outside the stock market environment that wouldn't be appreciated by the market, such as high technology investments for long-term growth. This can often be achieved more effectively by private equity investors than on the capital market.

Currently, it seems that the market doesn't understand software companies well, considering the delisting of Software AG or Suse…

Obermann: Times have become tougher for technology companies. But this is not new. We've had waves before, for example, in the early 2000s when the internet bubble burst. Eventually, the market cools down. Then the wheat is separated from the chaff, and companies like Ionos are well positioned: very solid companies with a broad technological foundation, experienced management, well-capitalized, and very innovative, especially in terms of AI-based products. I am generally optimistic about the tech sector. The trend to digitize and make products, services, and processes smarter is still in its early stages.

At this point, it can be assumed that the interest rate turnaround is somewhat over, and valuations might have bottomed out. Is now the right time to buy?

Fowinkel: That doesn't play a big role for us. Warburg Pincus funds are long-term oriented, and that's the guiding principle for fund managers. It's about long-term, predictable technology trends or consolidation of often fragmented sectors, where companies can become much more efficient with the help of an investor like Warburg Pincus through acquiring smaller competitors. The growth opportunities these trends bring are still very attractive even after the interest rate turnaround. One of the theses Warburg Pincus has been pursuing for a long time is investments in digital infrastructures, where Europe still has significant needs. In telecommunications, there are exciting growth opportunities at all levels of value creation. Just think about the connectivity of billions of things. Expertise and capital are also needed in the energy transition sector.

But did the stock market losses of technology companies not have an influence on private transactions?

Fowinkel: Price is not the sole determining factor in a transaction. A company that brings an investor on board is seeking support, for example, for a transformation and chooses the best concept.

The way you describe it, it sounds like the transaction activity is somehow independent of the market environment. When was your last exit?

Fowinkel: Since the beginning of the year, Warburg Pincus has sold Polyplus to Sartorius for 2.4 billion euros. Once for All, a provider of supply chain management in the construction industry, was sold to a US investor, and the retail chain Reiss was sold to Next. In the context of the merger of Inmarsat with Viasat, we not only obtained a stake in Viasat but also a high three-digit cash purchase price. If we continue to develop our companies successfully, buyers will emerge.

Still, considering the high deal activity in the telecom sector, low valuations do matter. Which telecom assets do you find interesting?

Obermann: Regarding telecom assets, it's important to differentiate between the various segments, such as passive infrastructure, digital active infrastructure, and services or applications like messaging or video. Currently, our focus is not on passive and fully developed infrastructure like mobile towers. We are interested in infrastructure-bound business models that also include services for business and private customers, such as Odido, formerly T-Mobile Netherlands. Or infrastructure companies that are still in the early stages, which we can partner with to further develop so that pension funds with low risk tolerance can later acquire these companies from us.

In telecommunications, there are exciting growth opportunities at all levels of value creation. (…) We are interested in infrastructure-bound business models, such as Odido. Or infrastructure companies that are still in the early stages.

René Obermann

How much capital can you mobilize, and how much of that could be allocated to Germany?

Obermann: Unlike most other major private equity firms, Warburg Pincus invests in Europe from global funds. Capital is invested in companies that offer an attractive investment logic and whose sectors we understand. Regional investment quotas are not planned somewhere in the headquarters. Our task is to find promising companies seeking capital and advice for their sustainable success, and then advise our fund managers accordingly to make good decisions.

Do you currently have "specific opportunities" in Germany on your radar?

Obermann: We are currently looking at so much that we can hardly keep up with the work: digital, software-based infrastructure, including in the energy sector, software for businesses, and also the healthcare sector, to name just a few examples.

Is healthcare a segment where you want to expand your portfolio?

Fowinkel: Yes, software for the healthcare sector, providers of healthcare services, medical technology, and contract manufacturing are all interesting. Here, WP funds, together with Advent, acquired Baxter's Biopharma Solutions business for $4.25 billion in May. BPS is half German and half American, based in Halle, Westphalia. Germany has many small, innovative companies in this sector, often even world leaders in niches.

Digitization in healthcare is slow due to extremely protracted regulatory debates and hurdles. Do you see light at the end of the tunnel?

Obermann: First and foremost, we look at the market.The healthcare system in Germany is under massive pressure: too high a proportion of inpatient treatment, too little outpatient care, insufficient digitization, highly inefficient administration. We are convinced that responsible investors can make a positive impact on the entire system. Therefore, there are opportunities, especially through the use of modern technology and modern management. With benefits for patients and relief for the system. And the awareness is growing. However, as Walser said, nothing seems true without its opposite. There are also demands for less privatization and more state involvement. Let's see if we, as a society, are capable of learning and seizing the opportunities, such as through better utilization of data – a sensitive issue.

Which ones?

Obermann: When you undergo therapy, what happens afterward with the data about the success or failure of the treatment? Who evaluates it? Which data pool do they go into? Or where do radiologists send their images as training data for AI? We're wasting infinite potential. The entire system must come into motion, and it will, gradually and against much resistance.

At the moment, the IPO market is budding again as a delicate plant. Which companies in your portfolio are most suitable for an IPO and closest to it?

Fowinkel: Our portfolio managed from Berlin is relatively young; Warburg Pincus funds have held the investments on average for only two to three years. It's still too early for IPO plans. However, having receptive IPO markets is a huge advantage for a location, such as in the US. There, even smaller companies can go public and find long-term investors for their stocks; this doesn't work as well in Germany or the rest of Europe. The companies not only gain public visibility but also a currency with which they can make acquisitions or compensate employees.

Does that mean, as your portfolio companies are currently quite young, you would prefer an IPO in the USA?

Obermann: Fundamentally, our presence here stems from our interest in and commitment to Germany and Europe as attractive locations that we want to promote and nurture. That's why we opened the office in Berlin. But our primary goal is to develop a company and enhance its value.

Can you provide a specific example?

Fowinkel: Yes, for instance, Infoniqa, a company that offers software and services in the area of financial accounting and human resources for medium-sized businesses. With Infoniqa, we have made three acquisitions, creating a company that competes on par with companies like Personio, Datev, and Abacus in the German-speaking region. Infoniqa processes payroll for more than three million employees every month, operates employee portals and e-learning solutions, as well as software for entire accounting and business control. The company relies on modern technologies like artificial intelligence (AI) to automate bookings.

Regarding another company in your portfolio: There was talk about an acquisition at the broker pool Blau Direkt. Has that happened?

Fowinkel: Yes, with Blau Direkt, a technology-driven platform for insurance brokers, we have made several acquisitions in various areas. One, to expand the offering for brokers and insurers, and second, to consolidate the fragmented and often inefficient market.

Do you have a vision of where the company should go? And how far along are you with that vision?

Fowinkel: Blau Direkt aims to become the infrastructure service provider for independent brokers. Our goal is to offer independent brokers the most technologically advanced, efficient, and user-friendly portfolio of services, software, and conditions with insurers so that they can focus on servicing and acquiring clients. The Blau Direkt team has made significant progress in this regard, with their technology being at the forefront. The most successful independent brokers are already working closely with Blau Direkt, and with the assistance of Warburg Pincus, we aim to expand this position not only through acquisitions. In Germany, there are approximately 50,000 insurance brokers, and depending on calculations, Blau Direkt can potentially reach between 8,000 and 10,000 of them. This represents a significant market with over 1 billion euros in broker commissions annually.

Is there a lower and upper limit for the investment volume in a company?

Fowinkel: We often invest in two or more steps. In doing so, we keep an eye on the overall volume that we intend to invest in this specific industry. At the lower end, it's about 75 million dollars, and at the upper end, about 1 billion dollars per acquisition. At the same time, there are many examples where we have invested significantly over 1 billion dollars. If you have a good investment in sight, it's easy to find investors who want to join. This opens up opportunities for expansion.