Family-owned businesses in the DACH region represent one of private equity’s most compelling yet under-explored opportunity sets, but accessing their full potential requires specialist expertise, patience and a hands-on approach, writes Lorna Robertson.
Not all private equity strategies are created equal. In an increasingly competitive market, the difference between average and exceptional outcomes increasingly comes down to where managers choose to operate, and whether they are equipped to navigate complexity and situations that demand specialist knowledge and expertise.
At Connection Capital, we in the Funds team focus on identifying strategies that operate in under-served parts of the market. We look for opportunities where competition is limited not by capital availability, but by ownership dynamics, operational complexity and the need for an engaged, hands-on approach. These characteristics, in our experience, are far more consistent drivers of repeatable returns than leverage or market timing.
Family-owned businesses across Germany, Austria and Switzerland – the ‘DACH’ region – exemplify these characteristics in a particularly compelling way.
Family ownership through an investment lens
When assessing private equity strategies, we favour those where value creation is driven primarily by operational improvement rather than financial engineering. For a private equity manager, that typically means backing asset-light businesses with resilient revenues, clear scope for professionalisation, and the ability to scale into a broader buyer universe over time.
Family-owned companies often sit at the centre of this opportunity. Built for longevity, not optimisation, they benefit from strong cultures, loyal customers and deep market expertise, while frequently operating with informal governance, limited digital infrastructure and underdeveloped management processes.
What represents complexity for generalist capital, can, for specialist investors, be a source of meaningful value creation.
Why the DACH region stands out
The DACH region is home to approximately 4.5m privately held companies, and around 99% are SMEs, creating one of Europe’s deepest pools of founder- and family-owned businesses1.
Within this universe sits a large population of so-called hidden champions: businesses that are often unglamorous but crucial, operating in essential, often specialist niches providing mission-critical business services. These companies are rarely household names and attract little attention from growth or technology investors, yet they benefit from resilient demand, recurring revenues and strong local market positions.
Despite these attributes, many sit below the typical size threshold of large-cap and mid-market private equity funds, leaving them structurally under-served by institutional capital and overlooked by more generalist strategies and therefore more accessible to focused, specialist investors.
Structural inefficiency and the succession gap
Demographic trends across the region are creating significant succession pressure. In Germany, for example, around 31% of SME owners are already 60 years old or older, leaving a growing cohort of founders approaching retirement, without a clear succession plan in place. Recent status reports on SME succession also shows that around 190,000 owners plan to leave the market without a succession plan by the end of 2026, and that the shortage of suitable successors is the most frequently cited barrier to successful handover2.
While many of these businesses are profitable and resilient, succession is often delayed by emotional attachment to the business, valuation uncertainty, and a lack of trusted external options. This structural inefficiency creates a compelling opportunity for patient, relationship driven capital.
Value creation in practice
In this context, value creation is fundamentally operational. Professionalising management, enhancing governance and reporting, and investing in systems and digital capability, can unlock meaningful efficiency gains. In fragmented markets, this provides a foundation for disciplined buy-and-build strategies, allowing platforms to scale organically and through targeted acquisitions.
Crucially, these changes are not cosmetic. They reposition businesses within the private equity ecosystem, transforming founder-led, family-owned companies into scalable, strategically relevant platforms.
Entry dynamics and exit optionality
Private equity penetration in the DACH small-cap segment remains lower than in comparable European markets. This limits competition and supports disciplined entry pricing, with complexity acting as a natural barrier to entry for less specialised capital.
As businesses professionalise and scale, they become relevant to a broader universe of buyers, including mid-market sponsors and strategic acquirers. The result is not fewer exit options, but more.
A case study in disciplined fund selection
Family-owned businesses in the DACH region illustrate the type of structural inefficiency best addressed by specialist private equity strategies. More broadly, they reinforce the importance of strategy-led fund selection in an increasingly competitive asset class.
For investors, the opportunity is not just broad private equity exposure, but in identifying those managers operating in segments where under-penetration, operational focus and ownership complexity combine to create a durable advantage, and where returns are built through execution rather than momentum.
Important note
The type of investments offered by Connection Capital for self-selection by its professional clients are high risk and speculative. Investing places investors’ capital at risk and they could lose all of their money. There is no guarantee of investment return or distributions, and past performance is not a reliable indicator of future results. The investments are medium to long term and illiquid, so they are not readily realisable or easily transferable until the exit point.
Sources
- Federal Ministry for Economic Affairs and Climate Action, The German Mittelstand as a model for success; Schweizerische Eidgenossenschaft, Figures on SMEs: Companies and jobs, Federal Ministry (2020)
- KfW, KfW’s status report on SME succession: Some 100,000 small and medium-sized enterprises look for a successor every year (2023)