German companies rely on private equity even in the credit crunch
BVK: German private equity market ends a difficult year with a clear upwards trend
Almost 1,200 companies were financed by private equity last year, only 10% fewer than in the previous year. These figures prove the importance of private equity as type of financing for German businesses even in times of recession. When low equity ratios combine with restrictive lending practices on the part of banks, the demand for funding alternatives to classic bank credit increases. However, the financial and economic crisis has had a significant impact on the amount of private equity investments: in comparison with the previous year, 2009 showed a drop of three quarters to €2.36 billion. Over the course of the year, however, there has been an upwards trend: with €961 million, the fourth quarter was by far the strongest for investment (Q1: €343 million, Q2: €321 million; Q3: €736 million). This emerges in the statistics published today by the German Private Equity and Venture Capital Association (BVK) for the German private equity market in 2009.
The BVK expects an easing of market conditions in 2010. After increased investment activity was visible as early as the summer of 2009, the development in the fourth quarter reinforced this upwards trend. The current results of the BVK's market forecast "Private Equity Prognose 2010" also indicate that this trend will continue: a good two-thirds of the BVK members surveyed expect an increase in investments in 2010. A further conclusion of the private equity forecast: the trend towards minority shareholding and higher equity ratios will continue in the buy-out sector. Uncertainties for 2010 are above all the banks and their lending practices. Little impetus is expected for the venture capital market. The investment figures in this sector remain low as there continue to be too few independent venture capital funds in Germany.
Details of Activities
Declines in investments in 2009 were noticeable in all segments venture capital, growth finance and buy-out. However, the buy-out sector was particularly affected, with large transactions practically coming to a standstill in the first half of the year. Thus, buy-out investments in 2009 amounted to €1,142 million, over 80% less than the previous year. There were however strong signs of recovery in the fourth quarter: buy-out investments were higher in these three months than in all three of the preceding quarters put together. Along with the banks' caution, the chasm between buyers' and sellers' valuation perceptions as well as the uncertain future prospects of many companies are having a negative impact on the M&A market as a whole. This affects not only buy-outs but also growth finance aimed at medium-sized businesses; at €498 million this was below the previous year's level (€847 million). Venture capital investments slumped from €1,107 million to €611 million in 2009, although here, too, the fourth quarter was by far the strongest for investments.
There are few surprises in the 2009 annual results for fundraising. The amount of newly raised funds in the course of the year reached €1.24 billion and was thereby halved compared to the already weak previous year (€2.69 billion). At the same time, this signifies a downturn below the level of 2002 and 2003, also economically difficult years. Institutional investors were strongly affected by the slumps in the stock markets in 2009. As a result they also strongly resisted alternative investments - commitments to new funds were scarce. Despite this depression there are numerous private equity firms which still have access to sufficient capital from the strong fundraising years of 2007 and 2008.
BVK private equity forecast indicates easing
After the cuts of the previous year, private equity firms are cautiously optimistic for 2010. This is demonstrated by the results of a survey of BVK members about their expectations regarding fundraising, investments and the impact of economic development on portfolio companies for 2010. In the "Private Equity-Prognose 2010", more than two-thirds of respondents predict an increase in investments, and almost every fifth expects the level of investments at least to remain the same. In addition, firms tend to expect company valuations to remain stable or slightly decline.
Firms active in the buy-out sector expect transaction figures to increase again in 2010, especially in the takeover of distressed companies and family companies, but less with majority shareholding than with growth finance or minority shareholding. In addition, the majority of buy-out firms surveyed expect even higher equity ratios for financing transactions.
Private equity firms are also cautious regarding their fundraising plans, therefore a significant increase is not anticipated in 2010. Most firms reporting concrete fundraising plans do not intend to begin actively fundraising until 2011.
When asked about the challenges for portfolio companies in 2010, respondents listed financing topics above all. In particular, revision of financing concepts, limited credit financing and securing equity financing are viewed as key issues as in the previous year's survey. Grounds for somewhat greater optimism is that alongside customer retention and acquisition, other operative topics such as generating internal growth and opening up new markets have become more prominent on companies' agendas in comparison to the previous year.