Frankfurt/Main – While share prices in Germany have fallen by 10 to 20% over the past twelve months, the country's private equity market is continuing to heat up. That is the finding of the latest private equity panel survey, which is conducted three times a year by CMS Germany and FINANCE magazine. Some 40 private equity (PE) firms provide anonymous assessments of the market for the survey. Private equity managers currently regard purchase
prices as more expensive than at any time since the panel was formed more than six years ago. "There is a general feeling that current prices are high. Apart from the large amount of cash in the market, this is due to conventional private equity firms being joined in the market by an increasing number of other players. These include sovereign funds and pension funds, which previously tended not to get involved in direct investments. That is driving up prices," said CMS partner Dr Tobias Schneider.
More cash, fewer investment targets
It is notable that private equity managers are not necessarily switching to the seller camp in response to record-high company valuations. At 6.09 out of a possible 10 (= clear buyer) points, the average indicator for the current tactical stance has reached its highest level for more than a year – a strong sign of the intense pressure on the private equity sector to invest. More and more investor money is flowing into funds, while the overall number of available investment targets is not increasing. "Tight market conditions call for a creative approach by investors to avoid being crowded out or paying totally excessive purchase prices," commented Schneider. "In addition to seeking to avoid structured sales processes – something easier said than done – we have recently seen an increasing number of co-investments between private equity firms and strategic investors."
Business outlook supports expensive valuations
At the same time, several factors are supporting rising company valuations, meaning that new investments will not necessarily end up delivering lower returns for private equity firms than in the recent past. The PE managers polled have been bullish about the outlook for a considerable time, but their assessment is now even more positive, at 7.06 points (10 = very good outlook), marking the highest level since mid-2011. In addition, the weakness seen in the German finance market around the end of last year has now been overcome. Access to debt for buy-out deals has improved, as have the terms. "Rising purchase prices can be at least partly offset by the good availability of external funding on favourable terms," said CMS partner Dr Joachim Dietrich.
Competition from China
The M&A boom is also attracting new buyers, especially from China. 91% of the surveyed PE panellists are sure that interest among Chinese buyers is stronger now than a year ago. 88% expect the number of Chinese acquisitions in the German M&A market to rise further during the next twelve months.
Having said that, perceptions of Chinese buyers vary widely. 55% of the respondents believe that Chinese buyers are already competitive when participating in tightly run M&A processes against established German or international private equity bidders. Conversely, 45% of the PE managers surveyed doubt that Chinese contenders are already capable of holding their own in the final bidding round of an M&A process when up against experienced bidders. "Chinese investors have already demonstrated their ability to participate successfully in a competitive bidding process and beat established bidders. Private equity investors would be well advised to prepare for increasing professional competition from China," said Dr Joachim Dietrich.
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