3rd Quarter of 2018: Business climate at investment market remains very good

After its previous record hunt, the German equity capital market shifted back a gear in late summer. The business climate index of the German Private Equity Barometer fell by 5.0 points to 72.1 balance points in the third quarter of 2018, but remained at a very high level. The equity investors assess both their business situation (- 2 points to 77.6 balance points) and their business expectations (- 7.9 points to 66.6 balance points) slightly lower than in the record quarter before.

However, the very good business climate continues to be supported by a very stable market environment. Equity investors are particularly satisfied with the quantity and quality of their deal flow,  the low depreciation pressure and the extremely positive fundraising and exit climate. The latter two climate indicators consolidated again after a slight downward trend in the second quarter.

The business climate in the venture capital market continues to soar: the climate indicator for the early stage segment climbs by 4.1 points to 76.6 balance points. The valuations of both the current business situation and business expectations surpassed the best figures of the previous quarter. The indicator for the current business situation rises to 80.1 balance points (+5.6), the measured value for business expectations to 73.2 balance points (+1.4). The level of demand is assessed only slightly below its best value and its quality is now again receiving very good rating from VC investors.

By contrast, the business climate in the late phase segment fell by 12 points to 68.6 balance points in late summer. Although it thus remains very good, it is again clearly below its 80-point record of the previous quarter. The indicator for the current business situation fell to 75.8 balance points (-9.0), while the indicator for business expectations fell more strongly to 61.8 balance points (-15.0). In addition to a deterioration in satisfaction with the initial valuations, the reason for this is a lower willingness for new investments.

The German investment market continues to be strong and the recently expected change in sentiment has not taken place," says Dr. Jörg Zeuner, Chief Economist at KfW. "We are particularly pleased with the new record level of investor confidence in the VC market. The willingness to invest is high. With the new KfW Capital we can tackle the existing market gaps together. In the late phase segment, on the other hand, dissatisfaction with the initial valuations seems to have an impact on the willingness to invest. Demand here has risen sharply since the lowest point at the end of 2016, which would suggest more favourable entry prices. The high quality of German medium-sized companies, however, will continue to determine prices".

"The setback in the mood of late stage investors is no surprise in view of the increase in recent years and the record level achieved," adds Ulrike Hinrichs, managing director of the BVK. "However, the continuing positive mood on the VC market is pleasing. We are therefore optimistic that more venture capital will flow into start-ups in Germany this year than last year. The new KfW Capital will certainly make an important contribution to mobilizing more capital for German venture capital funds".

KfW calculates the German Private Equity Barometer together with the German Private Equity and Venture Capital Association (BVK) exclusively for the Handelsblatt. A detailed analysis with data table and graph of the current German Private Equity Barometer is available at www.kfw.de/gpeb .