German private equity market records significant rise in investments in the first half year

In the first six months of 2008, German private equity companies invested more than ever before as German companies received equity worth € 3,575 million. At € 2,643 million, the largest portion was provided by German investment companies - 43% more than in the previous year's period. These figures originate from the German private equity market statistics for the first six months of 2008 which were published today by the Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK). Demand for private equity remains high in Germany both in the start-up and technology field and among German SMEs. This should provide further dynamics to the market. In contrast, as expected, the previously lively fundraising activities by German private equity funds lost momentum.

This increase in investment is proof that neither the turbulence on the international financial markets nor general economic uncertainties have had much effect on PE companies in Germany. Both in the first and in the second quarter, investments exceeded those of the respective previous year’s quarters. All in all, German investment companies invested € 2,643 million in 544 companies, thereof € 2,212 million in German companies and € 431 million in foreign companies. For the first time detailed information regarding local investments made by investment companies domiciled outside Germany has been provided thanks to the conversion of the BVK statistical records to PEREP Analytics, the new pan-European statistics platform. The companies in question invested an additional € 1,363 million, raising the total capital invested within Germany in the last six months to € 3,575 million.

The rise in investment compared to the first six months of the previous year is due to increased investment both in the buy-out market (controlling interests) and in the venture capital market (venture capital and growth financing). Buy-out transactions accounted for 68% of the total investments made by German investment companies. In addition, 20% were invested in growth financing and 9% in seed and start-up commitments. All in all, buy-out investments totalled € 1,796 million – approximately 20% more than in the previous year’s period. At 59 compared to 60, the number of buy-outs remained quite stable. In the venture capital field, early-phase investments in seed and start-up companies totalling € 234 million exceeded the first six months of 2007 (€ 179 million invested in 255 companies).

After numerous German private equity funds closed new funds in 2007 and major buy-out funds achieved the best fundraising results since the year 2000, a significant - albeit expected - slowdown in fundraising occurred in the first six months of 2008. In the first half year, domestic PE companies raised new funds in the amount of € 992 million, thereof € 703 million in the first quarter and € 289 million in the second quarter. Hence, only half the funds of the previous year's period (€ 2,044 million) were raised. This decline was due, in particular, to the non appearance of new buy-out funds which, in contrast to previous years, did not dominate the fundraising. On the contrary, at 45% venture capital funds raised almost as much as the buy-out funds which accounted for 49% of the fundraising. 

BVK expects further lively demand for private equity in Germany. The financing difficulties experienced by German SMEs are expected to be exacerbated in particular by Basel II. Hence, companies will increasingly look for alternative financing opportunities such as private equity. Even young technology companies are still dependent on venture capital since banks frequently eschew the high risks associated with such investments. This should provide the market with further dynamics. In terms of fundraising, the picture is less rosy. The established German companies raised new funds in the recent past and are not expected to fundraise again before 2009. Consequently, no new impulses are expected in the current year - not least due to the consistent restraint prevalent among investors.

Despite substantial investment activities, Germany is still lagging far behind in European comparison. In the largest European economy, as far as GDP is concerned, the private equity investment volume is significantly lower than in Sweden, the UK, France or Finland. This is owing to the fact that the framework conditions for domestic private equity funds are still suboptimal. Legal provisions in particular are in need of substantial improvement. Since 2005, almost one-third of new German private equity funds were issued abroad. Internationally competitive legal framework conditions must be created in order to establish Germany as a relevant venture capital centre and provide more German companies with access to private equity. 

The current BVK statistics are the first to have been prepared by PEREP Analytics, the new pan-European statistics platform. PEREP Analytics, which is run by EVCA, the European Private Equity and Venture Capital Association, is a non-commercial joint project set up by 16 European private equity associations with the aim of establishing a uniform analysis and recording system for PE market data in Europe.

Detailed statistics relating to the German venture capital and private equity market in the first six months of 2008 are available for download at www.bvkap.de.