Business climate in the German private equity market continues to improve

• VC fundraising climate ascends to new heights
• Assessment of VC deal flow assessment dips
• Satisfaction with entry prices at rock bottom

The mood on the German private equity market reached a new high in early summer. The business climate index of the German Private Equity Barometer climbed by 3.4 points to 65.2 balance points in the second quarter of 2017. The indicator for the current business situation rose by 3.5 points to a new peak of 68.6 balance points while the indicator for business expectations increased by 3.3 points to 61.8 balance points. The submarkets trended in opposite directions yet again. Confidence among early-stage investors fell slightly, while later-stage investors were more confident again.

The business climate in the venture capital market cooled off marginally in the second quarter. The indicator for the early-stage segment declined by 3.4 points to a still very solid level of 56.3 balance points in the second quarter of 2017. Investors took a basically unchanged view of their current business situation, but are more pessimistic about future business: the indicator for the current business situation fell by 2.1 points to 57.6 balance points while the indicator for business expectations decreased by 4.6 points to 55.0 balance points. The fundraising climate on the VC market has virtually leapt to a new record high, and exit, promotional and tax environments continue to be assessed as very good. In contrast, the indicators for entry prices, pressure on write-downs, deal flow level and quality deteriorated to a substantial degree in some cases.

Following a reprieve at the beginning of the year, sentiment in the later-stage segment of the private equity market reached a new record high. The business climate indicator rose by 8.0 points to 71.5 balance points in the second quarter of 2017. Investors have never rated their business situation better. The indicator for the current business situation climbed 7.1 points to 76.3 balance points while the indicator for business expectations increased by 8.9 points to 66.6 balance points.

The improvement in the business climate in the later-stage segment was boosted by the fundraising climate – which continues to be good despite a noticeable slowdown – and very good exit opportunities. In addition, demand picked up significantly. The levels and quality of deal flow improved considerably in early summer. Later-stage investor satisfaction with entry prices, however, fell slightly again and reached a new historic low.

"Equity investors' dissatisfaction with high entry prices is understandable," said Dr Jörg Zeuner, Chief Economist at KfW, “but they reflect the high potential of many new business models. Digital business models, in particular, are often readily scalable. If they are successful, investors can expect enormous value increases. Start-ups also know this, of course, and go into negotiations with investors with the corresponding degree of confidence. SMEs are aware of their quality as well and expect interested investors to be ready to pay a certain amount. All of that is reflected in entry prices.”

Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK), added: "Market participants are increasingly sceptical about current valuation levels, whether in the venture capital or in the buyout segment. But valuations are not a major burden at the moment, as we are currently observing lively investment activity in all market segments. Private equity firms will not pay just any price either, and we are still nowhere near the much-debated bubble. Rather, firms are looking to reap benefits from the market situation. On the seller side, the current environment holds good opportunities for attractive valuations for equity sales. Those who are now selling can definitely do something to boost their fund performance."

KfW calculates the German Private Equity Barometer exclusively for the Handelsblatt together with the German Private Equity and Venture Capital Association (Bundesverband Deutscher Kapitalbeteiligungsgesellschaften –BVK). An in-depth analysis with data spreadsheet and graphic for the current German Private Equity Barometer can be found at www.kfw.de/gpeb.