Sentiment on the German private equity market remains buoyant

• Business climate dips slightly but remains very positive
• Early-stage investors are still upbeat, but minor decline in later stage segment
• Fundraising climate and exit environment strengthen again

Following its record-breaking run, the German private equity market shifted down a gear in late summer. In the third quarter of 2018, the business climate index of the German Private Equity Barometer dropped by 5.0 points to 72.1 balance points but remains on a very high level. Equity investors rated both their business situation (-2 points to 77.6 balance points) and their expectations (-7.9 points to 66.6 balance points) slightly lower than in the preceding record quarter.

The business climate remains very good nevertheless, bolstered by a very stable market environment. Equity capital providers are particularly satisfied with the quantity and quality of their deal flow, the low pressure on write-downs and the extremely positive fundraising and exit climate. The latter two climate indicators consolidated again after a minor downward trend in the second quarter.

Venture capital market sentiment continues to soar. The climate indicator of the early-stage segment rose by 4.1 points to 76.6 balance points. Assessments of both the current situation and business expectations exceeded the record levels of the previous quarter. The indicator for the current business situation climbed to 80.1 balance points (+5.6), while the indicator for business expectations rose to 73.2 balance points (+1.4). VC investors rated the level of demand only slightly lower than the previous record and now gave very good marks for quality again.

Sentiment in the later-stage segment declined by 12 points in the late summer to now 68.6 balance points. This is still very good but clearly below the record level of 80 points in the previous quarter. The indicator for the current business situation dropped to 75.8 balance points (-9.0), while the indicator for business expectations fell more sharply to 61.8 balance points (-15.0) – caused by higher levels of dissatisfaction with entry valuations as well as a reduced appetite for new equity investments.

“The German private equity market remains strong and the recently emerging sentiment turnaround has failed to materialise for now”, said Dr Jörg Zeuner, Chief Economist of KfW. “We are particularly pleased about the new record level of investor confidence in the VC market. Investment appetite is high, so with the newly created KfW Capital we can take steps together to close the remaining market gaps. In the later-stage segment, on the other hand, dissatisfaction with entry valuations currently appears to be affecting investment readiness. Here, demand has grown significantly since the low at the end of 2016, which would suggest more favourable entry prices. But what ultimately determines the price is the high quality of German SMEs.”

“The setback in the sentiment of later-stage investors comes as no surprise, given the increase of the past years and the record level achieved”, added Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK). “What is pleasing is the continuing positive sentiment in the venture capital market. This should increase investment appetite, which is why we are optimistic that more venture capital will flow into start-ups in Germany this year than last year. The new KfW Capital will surely make an important contribution to mobilising more capital for German venture capital funds.”

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). You can find a detailed analysis with a spreadsheet and graph on the latest German Private Equity Barometer at www.kfw.de/gpeb.