BVK: Private equity at record levels

“The German private equity market reported a record year in 2017. A total of €11.3 billion was invested in some 1,100 companies by private equity firms last year,” said Joachim von Ribbentrop, Board spokesperson for the German Private Equity and Venture Capital Association (BVK), at a press conference on the preliminary statistics published today on the German private equity market in 2017. The investment volume therefore exceeded the previous year’s level (€6.77 billion) by two-thirds. “Investments in the buyout segment in particular rose sharply year on year, although one-off effects also contributed to this,” Ribbentrop continued.

“Irrespective of this record result, the private equity sector has once again demonstrated its significance as a key driver of growth in start-ups and SMEs. More than 5,000 companies in Germany are currently financed with private equity, and nine in ten of these companies have less than 500 employees,” said Ribbentrop.

Surge in buyout investments

Buyout investments totalled €8.94 billion, over three-quarters more than the previous year’s €5.02 billion. Once again, a few large transactions were largely responsible for this. The most spectacular transactions in 2017 were the takeovers of STADA, Germany’s biggest buyout in more than 10 years, and Ceramtec. “In addition, a few transactions that were announced at the end of 2016 were only closed in 2017 and therefore had a positive impact on last year’s investment figures,” Ribbentrop added. “In addition to the multi-billion Euro transactions that captured the public’s attention, the small and medium-sized company sector also saw brisk investment activity. Private equity is still readily accepted by SMEs.” The number of buyouts increased from 119 to 150.

Minority investments (growth, replacement and turnaround capital) in the SME sector also saw an increase in investments. Compared to 2016 (€0.69 billion), total investments almost doubled to €1.33 billion thanks to a few large transactions.

Venture capital market remains stable

The year 2017 was also a successful year for venture capital firms, after investments hit their highest level since 2008 at €1.06 billion in 2016. “At €1.05 billion, the satisfactory upward trend in investments was confirmed again last year,” said Regina Hodits, BVK’s board spokesperson for venture capital. Some 600 start-ups were financed, which once again accounted for more than half of all companies that received financing last year. “The combined efforts of the venture capital industry and policy-makers to create fertile ground for start-up financing continue to bear fruit. However, more capital is still needed to support start-ups and promote the growth of young companies in Germany,” added Hodits. “We are optimistic that the new federal government will also take this issue seriously.”

Fundraising remains good

With new fund capital of €2.98 billion, German companies were able to raise practically the same amount from investors in 2017 as in the previous year (€2.93 billion). “The funds are currently benefiting from the high degree of interest in alternative investments like private equity among institutional investors,” Hodits explains. “Fortunately, many venture capital funds were again able to benefit from the favourable fundraising conditions. The commitment of the public sector is also paying off in this respect.” Venture capital funds accounted for €1.49 billion of fundraising, slightly more than in 2016. Buyout and other funds with a focus on mature companies, on the other hand, were just below the previous year’s level, likewise at €1.49 billion.

Outlook for 2018

“It will be hard to repeat this investment volume that was boosted by one-off effects in 2018,” said Ulrike Hinrichs, Executive Board Member of BVK. “On the back of stable economic and political framework conditions, however, we can expect business to remain robust. There is currently no indication that 2018 will not be another successful year for our industry.” In the “Private Equity-Prognose”, a survey of private equity firms on their expectations for the current year, four in ten of those surveyed said that investments are likely to increase slightly or substantially in their respective market segment. One in two anticipates stable investment levels at least. Venture capital firms are especially optimistic, where almost half expect investments to increase, while one-third of growth-financing/buyout firms forecast higher levels. The companies surveyed also reveal a similarly positive sentiment when it comes to exit expectations.

Detailed, preliminary statistics on the German private equity market for 2017 (information updated in February 2018) as well as the “Private Equity-Prognose 2018” can be downloaded at www.bvkap.de. The statistical data is subject to continuous updates and may deviate from earlier and later releases.

Questions and answers on BVK statistics for 2017:

How did investments develop in the individual market segments?

In the venture capital segment, private equity firms invested just as much in 2017 as in the previous year (€1.06 billion) at €1.05 billion. Growth financing and other minority investments (replacement, turnaround) totalled €1.33 billion thanks to a few large investments at established SMEs, and therefore doubled compared to the previous year at €0.69 billion. Buyout investments increased by over three-quarters from €5.02 billion to €8.94 billion. The number of transactions also rose sharply from 119 to 150.

Which companies are primarily financed using private equity?

SMEs in particular are financed with private equity. In 2017, 93% of all of the companies that received financing had fewer than 500 employees, and 79% even had less than 100 employees. Four in five companies generated revenue of less than €10 million and only 7% reported more than €100 million. The over 5,000 private equity-backed companies in Germany employed some 960,000 employees, generating total revenue of €171 billion.

Which regions received the most investments?

The federal state of North Rhine-Westphalia is in the lead (22% of investments), followed by Berlin (19%), Bavaria (18%) and Hesse (15%). Bavaria lost its 2016 pole position.

Which sectors saw the highest levels of investment?

Business products and services (39%) accounted for more than one-third of investments, while biotech/healthcare (16%) and ICT (15%) also saw substantial inflows.

How did the disposal of investments develop?

The volume of divestments increased by one-quarter to €5.42 billion year-on-year. As in the previous year, trades sales were the main exit channel, which accounted for half of the exit volume. Sales to other private equity firms accounted for an additional 40%, where volumes more than doubled.

How did fundraising develop?

At € 2.98 billion, fundraising achieved the same level as in the previous year (€2.93 million). Venture capital funds accounted for half of this. Fundraising in this segment improved slightly from €1.33 billion to €1.49 billion. Buyout fundraising dropped from €1.46 billion to €0.94 billion. Funds with a focus on growth finance and minority investments raised €0.5 billion.

Which factors could impact the outlook for the private equity sector in 2018?

The economy and global and European interest rate policies are having a fundamental impact on the sector. Private equity firms are currently reporting sustained high demand for private equity in all market segments. There is market-specific uncertainty regarding the continued high valuation levels. According to the “Private Equity-Prognose” for 2018, just over half of the private firms forecast a trend toward rising company valuations. This equates to double the number of firms compared to the previous year. Four out of ten private equity firms surveyed forecast unchanged valuations for the financed companies.