German Private Equity Barometer: year started off on a subdued note

• Early stage sentiment drops from record high level but remains good
• Later-stage climate stabilises
• VC fundraising climate climbs to all-time high as entry prices ease

Sentiment in the German private equity market continued to fall after the turn the year. In the first quarter of 2019, the business climate index of the German Private Equity Barometer dropped by 3.1 points to 64.7 balance points. Market players view the current business situation more negatively and have more pessimistic expectations. The indicator for the current business situation dropped by 2.7 points to 70.7 balance points, while the indicator for business expectations fell 3.5 points to 58.6 balance points.

The business climate in the VC market was unable to maintain the record level from the final quarter of the previous year, taking a 12.6 point tumble to 66.7 balance points at the start of the year. VC investors have further downgraded their assessments of their current business situation and their expectations. The indicator for the current business situation fell to 71.1 balance points (-11.5), while the indicator for business expectations dropped to 62.4 balance points (-13.7). The VC market environment remains strong, however. The fundraising climate scaled new heights to beat the previous record of the final quarter of 2017. Assessments of the strength of deal flow also continued trending upwards and climbed to a new record high. Moreover, entry prices eased noticeably.

Sentiment in the later-stage segment stabilised at the start of the year after dropping sharply in the second half of 2018. The corresponding indicator rose slightly by 3.5 points to 63.2 balance points in the first quarter of 2019. Investors rated their business situation and expectations slightly more positively again. The indicator for the current business situation rose to 70.4 balance points (+3.4), while the indicator for business expectations climbed to 56.0 balance points (+3.6). Despite the drop in sentiment in the second half of 2018, the market environment appears to be very stable so far. The fundraising climate is on a very high level and assessments of deal flow level and quality and of companies’ innovation activity are rated ‘good’. In addition, later-stage investors’ dissatisfaction with entry prices at the start of the year improved significantly. By contrast, the exit environment has worsened, particularly the assessments of the IPO exit channel. Opinions here shifted within four quarters from a record high in the first quarter of 2018 to now well below average.

“The fundraising climate has been very good for some time now and kept entry prices high”, said KfW economist Dr Georg Metzger. “Even the growing number of investment opportunities did nothing to change this. Now, however, the negative mood in the stock markets has impacted on entry prices. Equity investors are likely to take advantage of this for new business.”

Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK), added: “The minor current downturn in sentiment means confidence has stabilised on a high level and merely underscores that the equity market is quite capable of correcting itself and not turning into a bubble unchecked, as some observers have already postulated. This is also consistent with the fact that we have evidently reached peak price levels. With a view to the industry’s future, it is now important to make use of the good fundraising environment and secure new funds for investments of the future. After all, demand for equity capital from companies of all sizes remains unabated.”

KfW calculates the German Private Equity Barometer exclusively for the Handelsblatt business daily 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.