Money talks. And it talks as fluently in German as it does in the language of any other free market economy. This is one of the principal conclusions to be drawn from discussions with those close to private equity in Germany, where a genuine sea change in thinking seems to be taking place.

The realisation that there is money to be made by selling off unwanted businesses to private equity houses has blown away at least some of the suspicion that still stubbornly surrounds private equity in Germany. Corporates and families who either don't want to, or simply can't, face up to the changes that are needed to ensure a viable economic future arguably see the attractions of private equity more clearly today than ever before.

Even the government has finally bought into the game, if Blackstone's recent ¤2.7 billion investment in Deutsche Telekom is anything to go by. "No politician can support the locust debate now that a government entity has climbed into bed with private equity," says Thomas Kubr, CEO of Capital Dynamics in Zurich. "The same institution that kicked off the locust debate has actually helped to do this deal." He adds, though, a note of caution. "We've seen the occasional isolated deal in Germany in the past, and this could be another of those false dawns. It's a huge deal, yes, but it's not a groundswell." Dr. Holger Frommann, Managing Director of the the German Private Equity and Venture Capital Association BVK, agrees. "This is not the only transaction of its kind, but I can't see a wave of activity," he says.

The vast majority of private equity activity in Germany continues to be carried out by international firms. And while a new debate begins to unfold as to what the extent of international private equity involvement in the restructuring of Deutschland AG will be, genuinely local private equity activity remains modest, even tiny, a state of affairs which is confirmed by the official statistics. While extrapolating from any single short period of time can be dangerous, the BVK reports that compared to last year's first quarter German private equity firms raised more funds invested in more companies. The German private equity market is in good shape, says the BVK. Investors are regaining confidence in Germany as an economic location, says Prof. Dr. Michael Gross, Vice Chairman of the BVK Board.

In the first three months of the year 2006, BVK members raised new funds totalling ¤553.1 million including six funds totalling ¤311.1 million from external investors. The main focus of the funds was expansion and buy-out amongst Mittelstand companies, says BVK.

Investments in the first quarter 2006 totalled ¤510.8 million, exceeding all previous quarters except the very busy 4th quarter 2005 when ¤1,923.6 million was invested in 419 companies. "Usually, the first quarter of a year is the weakest with regard to investments," said Dr. Holger Frommann, Managing Director of the BVK. "Experience shows that investments will increase in the course of a year."

The figures show a trend to smaller buy-outs in the Mittelstand, says the BVK. There were 26 buy-outs totalling ¤323.2 million, two-thirds of all investment. Venture capital investment of ¤187.6 million Euro) made up the other one-third, the value largely unchanged from the first quarter of 2005 (¤194.4 million).

A number of relatively large sales saw exits reach ¤496.9 million, not far off the level achieved in the first quarter of 2005 (¤566.6 million ). "Equity and M&A markets have recovered; that's why trade sales and sales of shares dominate the first quarter,"explains Gross. Trade sales accounted for 30.2 per cent of the exit amount, while sales of shares as lock-up periods expired account for 35.5 per cent. Total losses amounted to ¤33.7 million, down further from the figures seen in 2005, and equivalent to 6.8 per cent of the exit amount.

Success breeds success, as touched upon by Dr Fromman. Other market observers, and history, suggest that the realisation that there is still more money to be made by taking on the challenges posed by struggling businesses will surely lead to steady growth in the number of private equity firms taking an active interest in the market. "Despite the successes we have seen over the past 12 months, Germany has a smaller amount of professionals active in private equity than comparable markets elsewhere, and in all markets where profitability comes in you will get growth," says Moose Guen, chief executive of Mvision Private Equity Advisers. He expresses general contentment with the positive but undisclosable performance figures he has seen in a variety of investment portfolios.

Despite the Government's retreat from the locust position, a degree of discretion is still necessary in Germany, it seems. Those professionals already active in Germany would rather not shout too loudly about the revenue growth they are achieving, or the exit multiples they think they will achieve in due course. While the ability to drive change will increase efficiencies, the process requires job losses and other painful short-term pain to make it work, measures which the victims will understandably paint negatively.

Much progress has been achieved to date in improving the image of private equity in Germany, but a good deal of missionary work remains to be done to enhance the understanding and appreciation of private equity. "Private equity is like maintaining a beautiful bonsai tree," argues Moose Guen. "If you don't look after it properly, it grows out of shape. The private equity process helps companies to concentrate on growing again. This is not economically damaging. This is adding value."

The final word goes to David Martin, Hamburg-based Managing Director of Granville Baird Capital Partners Advisors Limited. "German politicians and journalists are not so different to their UK counterparts so it was no surprise that the locust story diverted attention from more sensitive political matters and made the headlines," he says. "It is much less interesting to hear that before Blackstone bought a piece of Deutsche Telekom, German governmental bodies sold huge volumes of apartments to private equity firms. The reality is that private equity is here in Germany to stay and everyone knows it. Politicians are slow to make reforms but the direction they are heading is right. "