Private equity panel 2015 II survey by CMS and FINANCE: Market conditions turning private equity investors into sellers

Frankfurt/Main – The German private equity market is showing signs of a slight downturn after the buoyant mood experienced since last summer. Deteriorating financing conditions and business prospects mean that investors in the SME sector are increasingly joining the ranks of the sellers. However, PE professionals expect conditions to improve in the second half of the year, according to the findings 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.

More exits and more expensive Investments

Overall, private equity investors in the German SME sector remain positive, but key metrics are signalling a slowdown. Respondents believe the business prospects of their portfolio companies are slightly weaker than they were at the start of the year, the proportion of private equity investors who currently regard themselves as sellers rather than buyers has risen from 45 to 50 per cent, and the panel's positioning indicator – which reflects the market stance of PE professionals – is trending more strongly towards sellers than at any time in the last four years. “In view of the very high purchase prices currently prevailing, more and more investors are thinking about exits,” says CMS partner Dr Joachim Dietrich. The panellists estimate that purchase prices are currently twelve per cent higher. According to the respondents, the financing environment remains robust but weaker than in the two previous panels. The availability of external funding for acquisitions (buy-out debt) has decreased by two per Cent but remains high; the terms and conditions for external finance are rated four per cent lower. Investments are thus felt to be more expensive, and the leverage effect of favourable funding deals, which previously compensated for high purchase prices, is reduced. “If a gap opens up between price expectations and financing options, it will complicate and slow down deals,” predicts CMS partner Tobias Schneider.

New takeover targets expected

Investors nevertheless believe that the market will pick up over the remainder of the year, as happened last year. However, two thirds think that the deal flow of new transaction opportunities currently cannot keep pace with increasing valuations and financing opportunities. Three quarters of the respondents expect that more attractive acquisition candidates will come onto the M&A market again in the months ahead. The vast majority of respondents agree on the main causes of uncertainty: “Geopolitical and macroeconomic risks, such as the ongoing conflict in Ukraine and the European sovereign debt crisis, continue to have a significant impact on decision-making by all M&A market players. Only long-term political solutions can remedy the situation effectively,” comments Dr Joachim Dietrich. In contrast, most respondents are more relaxed about the risk of a slump in corporate profits or the stock markets.

For the fifth time in a row, the healthcare sector is the most popular investment target. “Valuations are still impressively high for both private equity and venture capital – a trend that is set to continue,” says Dr Tobias Schneider, giving his assessment. The next most popular targets are services and software/IT. Cleantech continues to move up the rankings, having overtaken financial services providers and construction companies.

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