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Caution on private equity deals – improvement expected, says PE panel

Germany’s private equity investors are currently very cautious about new investments. Deals in the German private equity market are correspondingly rare. Company valuations are too high, while access to external finance remains difficult. However, there are signs that the market could have bottomed out.

Those are the key findings of the private equity panel polled three times a year by CMS Hasche Sigle and FINANCE. The survey covers some 40 private equity firms, with partners being asked anonymously about their assessment of the market.

"The German economy is still in excellent shape despite all the risks. That also applies to most of the companies up for sale. A seller would be crazy to reduce their purchase price expectations at present," says Dr Tobias Schneider (pictured), partner at law firm CMS Hasche Sigle, commenting on the fact that PE investors regard company valuations as the least attractive they have ever been.

Alongside high valuations, the financing environment also continues to hold PE investors back. For more than half of respondents, restricted access to finance is a big or very big contributory factor to the low level of deal activity. "On the other hand, competition from emerging markets is not a key issue. Private equity investors feel they are competitive, as long as a competitive finance package is available," says Dr Joachim Dietrich, partner at CMS Hasche Sigle.

Respondents assess the availability of external funding as low, but better than in the winter. Back in May 2010, following a similar improvement, the market saw a rise in deal activity, culminating in two good years for SME private equity in Germany. "Although we seem to have emerged from the trough, it’s still hard to assess the repercussions of capital market turbulence on acquisition financing. It nonetheless remains true that there will always be a market for good assets," believes Schneider.

In fact, there is no evidence of a widespread negative view of the economic environment. PE investors still regard the corporate earnings outlook as robust. There have nevertheless been some major changes in the attractiveness of individual target sectors. Winners include the logistics, chemicals and telecommunication industry. The most attractive investment target remains the service sector, for the third time in a row. Trade and cleantech are the biggest losers. The former darling of PE investors, cleantech is now a lowly third from last out of 15 sectors covered by the survey, following a series of cuts to subsidies. CMS partner Dietrich believes this is not just a blip: "Whether the situation changes in future will depend on whether the cleantech industry can succeed in generating attractive profits without state support or with only a low level of subsidies."


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