Private equity panel 2014 III survey by CMS Hasche Sigle and FINANCE: Private equity investors shifting to the seller side

Frankfurt/Main - German private equity investors are currently in a tactical quandary. The latest survey of the private equity panel polled three times a year by CMS Hasche Sigle and FINANCE magazine revealed that while overall conditions, such as high levels of liquidity and ongoing good business prospects for portfolio companies, are actually favourable, firms are still faced with hefty price tags for acquisitions. Some 40 private equity (PE) firms provide anonymous assessments of the market for the survey. In the current scenario, they are adopting a correspondingly neutral position. Although a majority still regard themselves in tactical terms as buyers of companies, 47% now classify themselves more as sellers - an increase of nine percentage points compared to the May survey.

Positive environment being held back

Despite the upcoming stress tests for banks and some substantial losses on the stock markets, liquidity inflows into the market have rarely been higher. With regard to the availability of buy-out finance, the panel posted the eighth consecutive rise, reaching a new record level of more than eight points; terms improved significantly by 9% to almost seven points (1 = poor, 10 = excellent). Portfolio companies still appear to be delivering stable performance.
Although expectations in relation to the business outlook are down slightly, the decline from 6.97 to 6.47 points is taking place on a high base. By contrast, private equity investors still regard the purchase prices for new investments as expensive, despite a 12% improvement compared to the previous survey. "Cash is ready and waiting to be invested, but high purchase
price expectations and the well-filled coffers of strategic investors are acting as a brake on the essentially positive conditions," says Dr Tobias Schneider, partner at CMS Hasche Sigle. His colleague Dr Joachim Dietrich adds: "If concerns about a slowdown in the economy continue to grow, falling purchase prices due to weaker business prospects cannot be ruled out." Ironically, the automotive space - one of the main target sectors of the private equity industry - is currently suffering to an exceptional extent from the growing reluctance to make new investments. Its attractiveness continues to slide and it now only ranks in twelfth place. The cleantech industry still brings up the rear. As in May, the first three positions are taken by healthcare, services and software/IT.

Compliance becoming a key issue

In addition to the typical challenges in the various industries, such as high purchase prices and intense competition, the private equity industry apparently also needs to learn to deal more effectively with the issue of compliance. The importance of compliance audits for new investments has increased in the past five years at more than two out of three PE firms; almost three quarters believe that the risk minimisation tools used by their firms "offer scope for improvement". Most firms nevertheless still underestimate the risk of inefficient compliance systems, even though compliance violations by portfolio companies are increasingly likely to affect the underlying PE investor.

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