Business sentiment on German private equity market stabilises again

• Mood improved in the second quarter after slump at start of year
• Early-stage segment is clearly more optimistic, but later-stage segment is down
• Demand for VC has reached a record high – but VC providers deplore quality and innovative content

Sentiment on the German private equity market stabilised again in the early summer after a slump at the start of the year. The index of the German Private Equity Barometer for the second quarter of 2016 rose slightly by 2.2 points to 47.6 balance points. In contrast to the previous quarter, market sentiment in the early-stage and later-stage segments is currently moving in opposite directions.

In the early-stage segment the business climate improved by 9.3 points to 41.3 balance points in the second quarter of 2016 and is now significantly above its historic mean value after the sharp sentiment correction in the previous quarters. Assessments of the current business situation (+9.4 points to 42.7 balance points) and business expectations (+9.2 points to 39.9 balance points) have both improved substantially. Early-stage financiers rate the fundraising and exit climate roughly as positively as before. They see the pressure on write-downs as being within the normal range but regard entry prices as unfavourable. Demand for venture capital finance jumped to a record high, but early-stage financiers were more unhappy with the quality of demand than they have been since early 2009. Assessments of innovative content on the demand side are also much more negative than before but remain on a very high level overall.

The downturn in sentiment in the later stage of the private equity market continues. Although the business climate indicator fell only slightly by 3.3 points to 15.3 balance points in the second quarter of 2016, it still just barely remains on a good level. The renewed drop in sentiment was due to more negative assessments of the current business situation (-9.7 points to 53.1 balance points), while expectations have improved slightly (+3.1 points to 49.5 balance points). Later-stage financiers gave the fundraising climate and pressure on write-downs almost the same very good rating, and the exit climate has returned to a very high level as well. By contrast, assessments of entry prices and demand for equity capital have fallen near their lows. Assessments of the innovative content of potential target enterprises have virtually plummeted, in a similar way as the trend in the early-stage segment.

“We expect the business climate to improve in the current quarter”, said Dr Jörg Zeuner, Chief Economist of KfW Group. “For the young innovative growth enterprises to take advantage of this, it will remain crucial for them to convince their investors of their competitive advantages. A successful strategy includes realistic forecast scenarios as well as the right choice of investors with industry knowledge.” Ulrike Hinrichs, Executive Board Member of the BVK (German Private Equity and Venture Capital Association), added: “Private equity is popular with start-ups and SMEs, which is reflected accordingly in increased demand. While this enables investors to choose from a number of investment options, they also need to be able to identify the most promising enterprises. The lively investment activity especially in the venture capital market demonstrates that this works. I therefore expect sentiment to continue trending positive in the second half-year, also because of an improving business outlook.”

KfW calculates the German Private Equity Barometer exclusively for the Handelsblatt together with the Bundesverband deutscher Kapitalgesellschaften e.V.(BVK; German Private Equity and Venture Capital Association). You can find a detailed analysis with a spreadsheet and graph for the latest German Private Equity Barometer at www.kfw.de/gpeb.