In spite of considerable market unrest, the German private equity landscape is seeing momentum return on the financing front and to portfolio companies.
The purchase prices of potential takeover candidates are at a record high, however, as the latest private equity panel survey by CMS and FINANCE magazine reveals.
The survey, which is conducted three times a year, asks senior managers at around 40 leading private equity firms investing in the German SME sector to provide anonymous assessments of the market, along with forecasts. The new autumn survey continues to show that the marked economic slowdown in China could seriously jeopardise important year-end activity.
German SMEs held by private equity investors are well positioned to withstand the effects of the downturn in the Chinese economy: only 12 per cent have noticed a significant impact and 21 per cent anticipate no negative effects at all in the medium term. Nonetheless, 83 per cent of the private equity experts surveyed state that they are more cautious about M&A acquisition candidates with major exposure to China than at the beginning of the year.
“A valuation haircut is completely logical, but only represents a snapshot and can also be used as a tactical argument in price negotiations,” says Dr Tobias Schneider (pictured), partner at CMS Germany. The current emissions scandal in the automotive industry appears to be having a much larger impact. The sector is losing much of its appeal for investors, and PE managers rate automotive targets 20 per cent lower than in the spring. The most popular target sectors continue to be healthcare, software/IT (with the biggest increase to date) and services. PE investors thus seem content to stick with the megatrends of health, connectivity and digitisation, even though the financing situation has become much more accommodating for more challenging assets.
After PE experts saw both the financing environment and the business prospects of their portfolio companies continue to deteriorate slightly through spring and beyond, there is now a clear upward trend again. After the summer break, and with business prospects slightly improved, the finance market is achieving higher scores than at any point since the panel was formed. On a scale of 1 (weak financing environment) to 10 (strong financing environment), the respondents’ assessment of the availability of buy-out finance jumped by 7 per cent from 7.82 to 8.33 points compared to early summer. Having said that, PE experts now perceive purchase prices as being more expensive than at any time since the survey started. On a scale of 1 (high) to 10 (low), the average assessment of purchase prices fell from 3.43 points to a record low of 3.26 points compared to the spring survey.
“Finance is readily available on very good terms. The problem is the ever-increasing price expectations of sellers,” says Dr Joachim Dietrich, a partner at CMS Germany.
