Business climate in the German private equity market remained very good at the end of the year

• German Private Equity Barometer continued on a high level in the final quarter of 2017
• Early stage: fundraising climate surges to another record high
• Later stage: dissatisfaction over entry prices remains

The business climate in the German private equity market remained on a very high level in the final quarter. At 66.1 balance points, the business climate index of the German Private Equity Barometer ended the year only 4.0 points below the previous quarter’s record level. The indicator for the current business situation rose slightly by 1.1 points to 71.6 balance points. Expectations were down 9.1 points to 60.7 balance points.

Top marks for fundraising conditions, the write-down and innovation climate and the exit and promotional environment made the fourth quarter symbolic of the record sentiment in 2017. The only factor souring sentiment is the persistent gloom over entry prices.

The business climate in the early-stage segment remained very good thanks to record marks given for fundraising and the promotional environment at the end of the year. The relevant indicator fell slightly by 3.4 points to 65.6 balance points in the fourth quarter. The indicator for the current business situation was nearly unchanged, rising 0.2 points to 66.9 balance points. The indicator for business expectations was down 7.1 points to 64.4 balance points.

The later-stage segment ended the year with a moderate decline on a high level. Despite improved assessments of the quantity and quality of deal flow, persistent dissatisfaction over entry prices is dragging down sentiment. The sentiment indicator dropped moderately by 4.5 points to 66.6 balance points in the final quarter. The indicator for the current business situation rose by 1.6 points to 75.3 balance points. The indicator for business expectations was down 10.7 points to 57.8 balance points.

“Investors’ assessment of start-ups’ innovative strength is currently keeping pace with the development of VC entry prices”, said Dr Jörg Zeuner, Chief Economist of KfW. “Therefore, on average the higher valuations also reflect higher growth prospects when they are successful. It is normal for different investors to arrive at different assessments of the potential success of innovative technologies and business models. That is also why opinions vary on what is a reasonable price. Of course, it is important to keep an eye on how entry prices develop.”

Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK), took a positive view of the year: “It has been an outstanding year for the German private equity market. Sentiment is extremely good across all segments. This should translate into record investment and fundraising figures. The good assessment of the fundraising and exit environment is particularly pleasing and makes us optimistic about the year 2018. The ambitious valuations are likely to continue for the time being, but they also provide opportunities on the exit side.”

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.