Last year 1,140 German companies ranging from start-ups to large caps were funded with private equity - an increase of 5 percent against the previous year. In total, private equity firms invested € 8.4 billion in these companies. Of that amount € 5.9 billion came from Germany-based firms, a slight increase against the previous year (€ 5.6 billion). A finding published today in the 2008 statistics on the German private equity market released by the German Private Equity and Venture Capital Association (BVK) clearly demonstrates that the private equity sector is holding up well considering the global financial and economic crisis.

Total investments in German companies did however decline by about 21 percent compared to the previous year (2007: € 10.6 billion) on the back of particularly low investments in Q4 and a drop in investments by foreign private equity companies. Last year investments by foreign private equity companies were down to only € 2.5 billion after € 5.1 billion in 2007. Investments reflect continuing demand for private equity by companies despite or possibly because of the financial crisis as well as the requirement for financing alternatives to conventional bank loans.

In 2008, three quarters and therefore the majority of investments were attributable to buy-outs, even if their volume dropped from € 8.9 billion to € 6.4 billion. Seed and start-up investments were largely unaffected by the financial and economic crisis. At € 390 million they were exactly at previous year levels. Investments in expansion finance saw an increase, doubling to € 1.4 billion after € 0.7 billion in the previous year. This increase is mainly due to the rise in expansion finance for buy-outs companies as part of their activities. In 2008, many buy-out companies furnished their portfolio companies with new equity in a bid to insulate them against the impacts of the financial and economic crisis.

German private equity companies did however record considerable declines in fundraising. The volume raised in the course of the year reached € 1.9 billion, marking a massive downturn by two-thirds compared to the previous year figure of € 5.7 billion. Independent fundraising was particularly affected by the repercussions from the financial and economic crisis. Only € 1.3 billion were raised by independent private equity companies after € 4.2 billion in the previous year. This can of course be attributed to restraint by institutional investors and the fact that many companies already closed new funds in the previous year, which means that only few companies were involved in fundraising in 2008.

Survey among members indicating uncertain outlook

The outlook on 2009 is driven by considerable uncertainties. As a result of the global economic downturn it is worth assuming that the German private equity market is going to suffer further declines and that it is not going to reach the results of the previous year in 2009. This is also the conclusion reached by a survey held among BVK members as to their outlook for 2009, published together with the annual statistics. The “Private Equity Forecast 2009” asked companies to assess fundraising, investments and the repercussions of economic developments on portfolio companies.

A slight majority of companies forecast a slight or considerable downturn in investments. However, roughly one quarter of the companies which took part in the survey expect investments to remain at the same level as in 2008, or even to increase. Whilst the majority of venture capital companies and buy-out specialists share this view, medium-sized financers seem undecided, with almost as many expecting a drop in investments as those expecting an increase. There was general consensus as to the expected evaluations of target companies: More than three quarters of those asked believed that these would be below the level of 2008. The companies involved in the survey quoted energy/water/environment as the most attractive sector, followed after a considerable margin by biotechnology/pharmaceuticals/medicine. The experience of the last 18 months is reflected in the buy-out specialists’ assessment of several market-specific financing figures. Buy-outs with a higher proportion of equity as well as lower valuation and debt capital multiples based on EBITDA are expected in 2009.

Fundraising is not expected to improve in 2009. Only a few companies are currently involved in fundraising or plan to begin in 2009. The majority is not expected to start actively fundraising again until 2010. Companies expect sentiment among investors to continue to worsen, making it particularly difficult to close new funds.

When asked about their outlook for portfolio companies, it becomes clear that private equity firms and their portfolio companies are driven by the current economic situation in their conclusion that 2009 will be a year of challenges. The majority assume that there will be an increase in the number of companies going bankrupt. According to the companies which took part in the survey, rethinking financial concepts, dealing with problems arising from cut backs in credit financing or poorer terms and conditions for financing, safeguarding equity financing and remaining in a position to pay back external loans are among the greatest challenges facing companies financed by private equity in view of the economic situation in 2009.

BVK satistics are drawn up by PEREP Analytics, a pan-european private equity statistics platform. PEREP Analytics is a project bringing together 16 European private equity associations, run by the Euopean Private Equity and Venture Capital Association EVCA. Its aim is to provide a standard platform applicable across the whole of Europe for compiling and assessing private equity market data.

Detailed statistics on the private equity and venture capital market for the whole of 2008 and the “Private Equity Forecast 2009” can be downloaded at www.bvkap.de.