The German private equity market reached a new high in sentiment in early summer. The business climate index of the German Private Equity Barometer climbed by 3.4 points to 65.2 balance points in the second quarter of 2017. The indicator for the current business situation rose by 3.5 points to a record high of 68.6 balance points, and the indicator for business expectations increased by 3.3 points to 61.8 balance points. Developments in the submarkets are once again contradictory: The mood among early-stage investors is cooling slightly, while late-stage investors are showing a more positive mood.
The business climate in the venture capital market cooled slightly in the second quarter. The indicator for the early-stage segment fell by 3.4 points in the second quarter of 2017, still reaching a very good 56.3 balance points. Investors' assessment of their business situation remained largely unchanged, but they are more pessimistic about their business expectations: The indicator for the current business situation fell by 2.1 points to 57.6 balance points, and the indicator for business expectations fell by 4.6 points to 55.0 balance points. The fundraising climate in the VC market is virtually jumping to a new record high, and assessments of the exit, funding, and tax environments also remain very positive. In contrast, the indicators for entry prices, write-down pressure, and the level and quality of deal flow deteriorated, in some cases quite significantly.
In the late-stage segment of the private equity market, the business climate has successfully made a new attempt to reach its all-time high after its respite at the beginning of the year. The business climate indicator rose by 8.0 points to 71.5 balance points in the second quarter of 2017. Investors are rating their business situation better than ever. The indicator for the current business situation rose by 7.1 points to 76.3 balance points, and the indicator for business expectations rose by 8.9 points to 66.6 balance points.
Fundraising climate takes a hit
The improvement in the business climate in the late-stage segment is driven by a continued very positive fundraising climate – which, however, has suffered a noticeable setback – as well as excellent exit opportunities. Demand is also picking up significantly. The volume and quality of deal flow improved noticeably in early summer. However, late-stage investors' satisfaction with entry prices declined slightly again, reaching a new historic low.
"The dissatisfaction of venture capitalists with high entry prices is understandable, but they reflect the high potential inherent in many new business models. Digital business models, in particular, are often quickly scalable. If they are successful, investors can expect enormous increases in value. Startups, of course, are aware of this and approach investment negotiations with corresponding confidence. Medium-sized companies are also aware of their quality and expect a certain willingness to pay from interested investors. All of this is reflected in the entry prices."
says Dr. Jörg Zeuner, Chief Economist at KfW. Ulrike Hinrichs, managing BVK board member, adds:
"The current valuation level is viewed with growing skepticism by market participants, whether in the venture capital or buyout segments. However, valuations are not currently a major burden, as we are observing brisk investment activity in all market segments. Private equity firms are not willing to pay any price, and we are still a long way from the much-discussed bubble."
Rather, it is important for companies to take advantage of the market situation.
"On the selling side, the current environment for equity sales offers good opportunities for attractive valuations. Anyone on the selling side can certainly do something to improve their fund performance."
Further information on the German Private Equity Barometer
