German PE market outlook improving, says CMS Hasche Sigle
Following a disappointing year in 2013 there are increasing signs that the German private equity market could see a significant upturn in the months ahead.
Relevant indicators include good business prospects, moderate company valuations and a significant improvement in the options for using capital leverage.
Those are the key findings of the latest private equity panel survey, which is conducted three times a year by CMS Hasche Sigle and FINANCE magazine. Some 40 private equity (PE) firms provide anonymous assessments of the market for the survey.
The key driver for the increasing competitiveness of PE investors in M&A processes remains the extremely positive finance environment. Respondents had already become increasingly optimistic last year. Now their assessment of the availability of buy-out loans has jumped a further 15 per cent in the first survey of 2014, reaching the highest level since the survey began at the start of 2010. Financing terms are also at a record high, up 14 per cent.
"The banks are extremely keen to offer acquisition financing and often go a considerable way to accommodate investor’s wishes," says Dr Tobias Schneider, partner at CMS Hasche Sigle.
The growing assertiveness of PE investors in fiercely contested transactions coincides with a boost to the operational outlook of their portfolio companies. Although respondents regarded prospects as having stagnated during 2013, they are now up seven per cent. This is likely to affect the valuation of potential new acquisition candidates.
"Together with the availability of attractive finance terms, this could motivate PE investors to take a bolder stance in the market and help overcome the reluctance to pay higher prices," says Schneider. "Having said that, investors will want to achieve their expected returns and the higher the initial purchase price, the higher the sale proceeds need to be."
Another contributing factor is that PE investors evidently don’t feel company valuations have peaked yet. Although valuations are still seen as ambitious, there are no signs so far of prices becoming excessive and forcing investors to think long and hard before making new acquisitions.
The panellists seem to be paying increasing attention to the healthcare sector when considering new investments. After an 11 per cent rise, target companies in the healthcare industry are now rated as the most attractive, followed by food, electronics and the previous frontrunner, services.
"Private equity investors are showing an increasing interest in the healthcare sector. The steady stream of technical advances and demographic change in particular are turning the healthcare sector into an exciting investment arena," says Dr Joachim Dietrich, partner at CMS Hasche Sigle.
On the loser side, the apparently unstoppable decline of the cleantech industry continues; it has now slumped to the bottom of the 15 sectors rated in the survey.
The boom in the finance market not only puts private equity investors in a stronger position when competing for new targets, it also increases the opportunities for returning cash to their investors by way of recapitalisations. Significantly more respondents also expect an increasing number of IPOs as an exit option. The attractiveness of reselling to private equity investors or companies in the same sector is still viewed optimistically. As was the case in 2013, panellists' hopes are based primarily on doing deals with their colleagues when making new investments. In contrast, expectations have fallen slightly with regard to group spin-offs and company sales initiated by business owners.
Dietrich says: "Acquiring companies from other private equity investors remains by far the most important source of deals for the private equity sector. It's simply the case that there are relatively few attractive targets available for first-time acquisitions."
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