The first six months of 2006 have seen a slight downturn in the level of activity of large private equity-led transactions in Germany compared with the same period in 2005, which might lead some to question whether this is the beginning of the end of the buy-out boom in Germany.

Has last year's row over 'locust' private equity acquirers, who detractors claim are asset-stripping valued national companies, had a negative effect and led to a cooling of private equity investors' enthusiasm for Germany? Only time will tell, but all current signs point clearly in one direction: upwards.

Germany remains one of the strongest economies in Europe. German business sentiment has hit a 15-year high, according to recent surveys, although it remains to be seen how much of this is attributable to the euphoria surrounding the World Cup. That aside, there is a number of quantifiable factors that make Germany one of the most attractive places for private equity investments in Europe, if not the world.

The large German DAX 30 and MDAX companies have become increasingly important players in the M&A market as they have sought to find new investments and add-on acquisition targets as part of a general buying spree triggered by restructurings of their existing businesses over the last few years.

Recent examples include acquisitions by Bayer, Siemens, Linde and E.ON. These restructurings have, however, also involved disposals of underperforming or non-core parts of their businesses, in most cases to financial investors rather than strategic buyers, such as the 7bn (£4.8bn) sale by E.ON of the Viterra group to Terra Firma last year, the largest private equity transaction to date in Germany.

A number of large auctions will take place over the next six months and it is generally expected that private equity sponsors will be the most likely to succeed. The sale of Linde's materials-handling business to be auctioned off in the autumn is just one example. If current trends persist, it may not be long before we see an increase in public to privates as private equity investors, whether alone or in a consortium, acquire a DAX 30 or MDAX company rather than just one of its divisions.

The privatisation of the public sector is also an increasing source of interesting targets as govern-mental bodies at all levels seek ways of plugging holes in their budgets. In particular, the past couple of years have seen a number of real estate transactions in which state-owned companies have sold their extensive housing portfolios to private equity funds. These transactions have dominated the market in terms of the deal size and have set a trend that is likely to continue.

The city of Dresden's recent sale of its housing portfolio to Fortress is seen by many as a raw model for a debt write-off by a local government and is likely to be used as a template in future transactions. But transactions involving the public sector are not limited to real estate. The current auction by state-owned Deutsche Bahn of Scandlines, the largest ferry operator in the Baltic Sea, is arousing considerable interest from a number of private equity houses.

Despite the strong private equity interest in Germany, there has been considerably less successful acquisitions of the Mittelstand businesses than originally expected. But Mittelstand companies remain an important future target for buy-out houses. A large number of Mittel-stand businesses suffer from the tighter credit approval rules under Basle II and are too small to raise money on the capital markets; a buy-out can therefore be an attractive alternative for management.

Succession issues are also a potential driver behind those acquisitions where the businesses are owned by the families who started them but who are no longer interested or able to be involved in the management. The sale of ATU to Doughty Hanson and subsequent on-sale to Kohlberg Kravis Roberts & Co (KKR) is a good example of this development, and many others will follow.

Of course, this sudden surge in private equity investment has not passed without comment in the German press or among members of the political establishment, many of whom initially likened the buy-out houses to a "plague of locusts".

Although some may have feared that investors might be deterred from continuing their investments following this backlash of public sentiment, generally this has not been the case. Indeed, the locusts debate brought private equity investors into the focus of a wider audience and, notwithstanding the first wave of negative press, has led to a more balanced and less protectionist view of private equity investments in Germany. In fact, Blackstone's acquisition of a 5% stake in Deutsche Telekom (one of the major assets of the German state) did not raise criticism but rather praise and was viewed by many as a seal of approval for the whole private equity industry.

Going forward, a number of private equity houses have been raising funds over the past six months. Permira's recent announcement of the first closing of a 10bn (£6.8bn) fund will be followed by new funds from KKR, Blackstone and others of similar sizes. Although none of these funds is solely or even mainly targeted for use in Germany, at the very least, a fair share of the capital looks set to be invested in the German market. And this will not be due to the outstanding performance of the German team in the World Cup.

Oliver Felsenstein is a partner in Clifford Chance's private equity team.