“Novum Capital’s unconventionality is special in the German market.”

Dr. Dietmar Bauer holds a PhD in Chemistry as well as being a management consultant, investment expert and Operating Partner at Frankfurt-based private equity firm Novum Capital. Here, he explains what being an Operating Partner means to him, how his partnership with Novum came about, and what skills and experience he brings to the table.

Novum Capital: Dietmar, you have been in the investment business for over 20 years. Are you not bored yet?
Dietmar Bauer: Never! I work with various private equity funds as well as with other companies from a wide range of industries – and therefore with people who have completely different ways of thinking. How could that ever get boring?

Well, maybe because, as an investor and private equity advisor, you’re rarely involved in a company’s journey from start to finish.
That applies to many operations managers, too, though! They encounter existing structures and processes, and ideally, they build on them and develop them. And at some point, others come in and take over. I have been assisting some companies and their owners for years now, making use of my cross-industry and cross-company expertise on business models and value chains to help them stay competitive. This works very well.

In which ways exactly do you complement PE providers such as Novum Capital?
PE fund managers tend to be very good at comprehending company figures – and assessing future prospects based on this. They are also very good at illustrating company goals in numbers. But behind these numbers is the corporate life with all its factual and emotional facets, the day-to-day operations, the entire executive apparatus. These are the areas I am fortunate enough to become involved in from time to time – including as Operating Partner at Novum Capital.

What does being an Operating Partner mean to you?
Above all, I take this to mean that I am a trusted exchange partner for Novum, advising the team on deal sourcing, and establishing contact with companies in search of private capital and/or a new owner. In addition, I sometimes support the Novum team in deal preparation and new management appointments for newly acquired or existing portfolio companies. Occasionally, I will even join a company that has been acquired by Novum as a comparatively small co-investor. In such cases, the workload goes far beyond the level I am used to when acting as an advisor and “translator”.

Translator?
You often need one of those! After all, the language, the views, and the priorities of the medium-sized entrepreneurs of the German “Mittelstand” can differ significantly from those of private equity firms.

“The different approaches – quite literally – lead to frequent differences of opinion, making it necessary to ‘translate’ them for the respective parties.”

In which context for example?
For example, some owners wanting to sell their company will expect their sales price to be at least the equity value on the company’s balance sheet. In other words, they are working on the basis of the value they built up in the past. Private equity funds, however, calculate their maximum purchase price primarily on the basis of key figures relating to the future. The different approaches – quite literally – lead to frequent differences of opinion, making it necessary to ‘translate’ them for the respective parties in order to achieve a consensus on the company’s value.

Why did you choose to work with Novum Capital? After all, there are many PE firms out there.
I work with several PE funds. What I appreciate most about Novum Capital is the way the team works: they are always professional and sometimes unconventional, too. The latter is something special and not so easy to find in the German market.

What does “unconventional” mean to you?
Let me start with the opposite: “conventional” is when PE funds invest in a company after seeing comprehensive and transparent financial reports. When conventional funds don’t deliver the depth of information required by conventional standards – which frequently happens with small and medium-sized companies – they prefer to leave the deal well alone. Quite often, they won’t even take a closer look. They are simply too afraid of overlooking possible risks.

And Novum Capital isn’t?
No, no, of course they are. But this team will often consider questions like, “Could this potential portfolio candidate be interesting precisely because of its lack of transparency?” The Novum partners don’t want to overlook opportunities and that makes them brave. I appreciate that, it’s how I myself operate.

One of the acquisitions you were involved in as Operating Partner at Novum Capital was sold off by Novum after three years – to a strategic investor. What exactly was your contribution in this case?
I had been advising the seller, a medium-sized entrepreneur in the food industry, on and off for years. During this time, we developed a relationship of trust. One day, he asked me to assist him with the sale of his company so that he could retire. In short, I introduced him to Novum Capital, provided support during the selection process for the new senior management team, offered my advice and support to Novum and the entrepreneur during the transaction process, and assisted the new management team in the operational business as chairman of the advisory board.

What did the Novum team accomplish within this portfolio company?
What I find especially worth highlighting is that Novum co-developed a highly transparent financial system. For example, before the takeover, neither the management team nor Novum knew exactly which product line was bringing in how much profit. Soon after the acquisition, however, they did. In addition, we jointly effected a change in philosophy regarding product pricing.

“The many small and large successes in a relatively short time resulted in a sales price that – justifiably – was significantly higher than the purchase price.”

What were the changes you made in terms of pricing?
Most notably, for the first time in the company’s 60-year history, we involved the customers in price fluctuations for food raw materials. Since then, the company has been able to pass on rising raw material costs to its customers, at least in part. As a result of this and other measures to increase production efficiency, there was a sustainable increase in the company’s profitability. The many small and large successes in a relatively short time resulted in a sales price that– justifiably – was significantly higher than the purchase price.

You have an affinity with the food industry. Where does that come from?
It dates back to my time at university. I studied Chemistry at the Technical University of Munich in the 1980s – and later earned my PhD in the same subject.

What was the topic of your doctoral thesis?
(Laughing.) [2+2] cycloadditions of vinylidene iron complexes with alkynes.

Erm… Ok, I think we had better get back to your CV! Any chemist who knows his worth will usually go to work for a corporate lab for a few years, doing research, won’t he?
I was fully aware of my abilities, but I decided against the lab.

And instead?
After I’d earned my PhD, I immediately moved into operational management, with responsibility for turnover and employees. After a full-time MBA, I ended up working for a strategy consultancy. I also built and managed a new, globally active business unit for the Degussa Group. We managed to achieve a turnover of about 100 million euros with around 350 employees. And then, in 2001, I took the opportunity to initiate an investment fund with a former consulting colleague.

That wasn’t the most comfortable time for investments. The dotcom bubble had just burst in the stock markets and the 9/11 attacks on the World Trade Center in New York sent a shockwave through world politics and the economy.
Let’s put it this way: we learned a lot back then and during the crises that followed – incidentally, one of these lessons was that things have a habit of returning to normal quite quickly. In my experience, crises are always relatively short-lived within the private equity industry.

Compared to today, did PE firms need different skills to succeed 20 years ago?
The core criteria for success have remained the same.

And what are they, in your opinion?
My top criteria are a strong deal flow and a number of soft skills: a competent, committed team with strong communication skills and professional internal processes that allow for quick action; add to this social skills for dealing with all kinds of people as well as suitable access to company owners and, last but not least, a sense for the right timing for acquisitions and sales, and the right purchase price.

There has been a sharp rise in acquisition prices for companies in recent years. How do you see the PE market developing in the SME sector?
First of all: Market observers estimate the number of changes in ownership of family-run “Mittelstand” businesses in Germany at around 30,000 per year. About half of these changes take place within the owner families. The other half are management buy-outs, often involving private equity, or sales to parties that were not previously involved in the company. Therefore, I think deal flow will remain high, as will takeover prices.

Do high takeover prices pose a risk for PE firms?
Good PE firms will continue to find their gems and polish them to make them profitable for all stakeholders. I am pleased to be able to contribute to this as Operating Partner at Novum Capital.

Thank you very much for talking to us.

The interview was conducted by Mario Müller-Dofel.