German private equity market - confidence was up in final quarter

• German private equity market ended the year 2016 with the best business climate since 2007
• Situation assessments and business expectations are both higher
• Later-stage investor sentiment peaked at year-end, but optimism of early-stage financiers evaporated

At the end of 2016, sentiment in the German private equity market was the highest since 2007. The business climate index of the German Private Equity Barometer climbed 2.5 points to 62.1 balance points in the final quarter. This increase was driven by the indicator for the current business situation, which rose by 4.4 points to 64.6 balance points. The indicator for business expectations gained 0.6 points to close at 59.5 balance points. But equity investors were divided on their assessment of the business climate. While later-stage investors’ sentiment was at record high the end of the year, the mood among early-stage investors dropped again.

Although sentiment cooled significantly in the final quarter, confidence levels in the venture capital market remained good overall, with the business climate indicator of the early-stage segment falling by 12.7 points to 48.3 balance points. The optimism of the previous quarters appears to have dissipated for now. With a period of summer euphoria followed by winter gloom, the current development is consistent with the previous year’s trend. The sub-indicator for the business situation dropped by 8.2 points to 49.9 balance points for early-phase financiers and business expectations fell by as much as 17.3 points to 46.8 balance points. This is probably due primarily to the renewed surge in entry prices which apparently could not even be offset by what remains a very good fundraising climate, a tax environment rated the best in ten years, and large, high-quality demand.

Later-stage investors ended the year 2016 with record-high confidence (+12 points to 70.7 balance points). Both the indicators for the current business situation (12.4 points to 73.9 balance points) and for business expectations (11.6 points to 67.6 balance points) increased strongly. The key factor for reaching this top mark was probably the fundraising climate, which improved yet again.

The business climate in the German private equity market remained good overall in the final quarter of 2016. “The positive mood among equity investors is primarily due to the fact that we currently have the best conditions in almost ten years for fundraising and exits, that is, at the start and at the end of the equity investment process”, said Dr Jörg Zeuner, Chief Economist of KfW. “It is only in between, when they conclude the deals, that investors are dissatisfied, partly with the strength of the deal flow, but particularly with the high entry prices. But this is the downside of the outstanding fundraising and exit environment, and, hence, an unavoidable negative.”

“All in all, the environment for private equity capital remains favourable. Not even the high company valuations can weigh on sentiment because they will eventually pay off for the investors when they sell their investments”, added Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK). “We are particularly pleased with the good fundraising mood. But it should not hide the fact that we need more domestic investors, especially for venture capital funds. Furthermore, policymakers have provided a boost to the venture capital area with the course they have set for loss carry-forwards and the INVEST grant, so we generally look to the year 2017 with confidence.”

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.