2007: a successful year for the German private equity market - But inadequate operating conditions hamper sector’s development

In 2007 private equity companies operating in Germany invested €4.1 billion, about 13 percent more than in the prior year. At the same time companies managed to improve on the prior year’s fundraising result, thus attracting more new cash funds than at any time since 2000. This emerges from the 2007 annual statistics on the German private equity market published today by the Association of German Private Equity Companies (Bundesverband Deutscher Kapitalbeteiligungs-gesellschaften e. V. - BVK). This positive result cannot, however, paper over the sector’s continuing dissatisfaction with legislators and the operating conditions prevailing in Germany. A survey has revealed that nearly half of the BVK’s members regard the existing legal framework as inadequate or unsatisfactory.

In 2007 the private equity companies invested €4.1 billion in 1,078 companies, as against €3.6 billion in 970 companies in 2006. The rise in investment was due to an increase in buy-outs. On the other hand venture capital investments fell from €1.0 billion in 2006 to €840 million in 2007. However, this reduction in volume was accompanied by a marked rise in the number of companies financed by venture capital. This suggests more energetic investment activity, although the venture capital companies invested less in individual companies. Across the entire venture capital sector the early-phase investments showed gratifying increases. Their volume rose from €264 million to €349 million and their number from 337 to 467. Both start-up and seed investments made clear gains. At almost 80%, the bulk of the investments, as in prior years, went to the buy-out sector, where investments totalled €3.3 billion, over a quarter more than the prior year’s volume of €2.6 billion. In addition to a few very large transactions, there were numerous buy-outs of small and medium-sized enterprises. At 100, the number of buy-out transactions once again exceeded the very active prior year (92 buy-outs), which says something for the continuing attractiveness of German SMEs.
In 2007 fundraising by German private equity companies reached a volume of €4.2 billion, about half as much again as in the prior year (€2.8 billion). Independent investment funds raising their cash funds from institutional investors contributed €2.9 billion to the total funds raised. This enabled the upward trend observable since 2004 to be continued and the best fundraising result to be achieved since 2000. This, however, was not attributable to a broad improvement in fundraising, but rather to a few large investment funds of established German companies. Thus the six largest investment funds having a volume of more than €200 million each together contributed almost €2.2 billion to the total funds raised. The new cash funds were mainly raised from buy-out investment funds, which alone accounted for €2.3 billion. More than a third of the new cash funds came from international investors. If we take independent fundraising on its own, its share rose by way over 50%, which underscores the existential importance of foreign investors to German private equity companies.
But the positive market figures cannot paper over the continuing pessimism among German private equity companies and the country’s need to catch up with Europe’s other national private equity markets. Even the apparently outstanding fundraising result was due to a few companies which are now investing their venture capital abroad to avoid the uncompetitive operating conditions prevailing in this country and to which other German companies still see themselves exposed. More and more companies are announcing plans to go abroad, which would do irreparable harm to Germany’s reputation as a favourable environment for business, technology and start-ups.
The outlook for 2008 may be regarded with cautious optimism. Fundraising will probably not attain the past year’s level, as many companies have closed new investment funds and apparently do not plan to set up more new ones before 2009. Uncertainty continues to be generated by the legal imponderables. As regards investment activities, the BVK expects developments to vary from one market segment to another. In the venture capital sector 2008 will bring few changes in relation to the past year. In the case of buy-outs, especially of SMEs, business may be expected to continue at a brisk pace, as the number of attractive small and medium-sized enterprises on offer is large, and many new investment funds will probably expand their investment activities. On the other hand, in the large buy-out segment, which is almost exclusively the preserve of foreign companies, a relaxation of the situation following the credit crunch can probably only be expected from the middle of the year.

An exhaustive explanation of the private equity market statistics for the fourth quarter of 2007 and the whole year may be found at www.bvk-ev.de for downloading.