Frankfurt/Main – Highly favourable financing conditions and the continuing strong performance of German SMEs are putting private equity managers in the mood for buying, despite high company valuations and tightening of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung). That is the main finding of the latest private equity panel survey, which is conducted three times a year by CMS Germany and FINANCE magazine. Some 50 private equity (PE) firms provide anonymous assessments of the market for the survey. “In the mid-cap segment, we are already seeing transactions where banks are no longer approached, especially since debt funds also accept significantly higher multiples,” said CMS partner Jacob Siebert, highlighting the attractive financing conditions offered by debt funds. This all augers well for year-end deals in the M&A and private equity market: “The buyer’s market looks set to remain in place for some time,” said Siebert.
New top ratings for financing conditions
Although in early summer it looked as if German private equity managers would cash in on exorbitant company valuations, the tide has turned over the summer months: the proportion of PE managers who see themselves and their funds more on the seller side has fallen from 70% to 51%. Another factor is that financing conditions in the German private equity market are rated higher than ever before. The availability of finance for company acquisitions has never been better since the panel was established in 2010. The rating of 8.66 points is now only slightly below the absolute maximum of 10 points. In spring, the figure stood at 8.09 Points.
Extremely high purchase prices
The shift to a buyer’s market is all the more remarkable because the panellists continue to regard purchase prices for target companies as extremely expensive. At the same time, they view the business outlook for their own portfolio companies very positively over the next twelve months – their rating of 7.49 points is the highest level for six years. A price correction in the near future thus appears unlikely. CMS partner Tobias Schneider: “Anyone who doesn’t have the time or nerves to wait for purchase prices to come down, for which there is no evidence at present, needs to consider new investments. Even though prices are painfully high from a buyer’s viewpoint.”
A cause of uncertainty remains
Extremely high company valuations could nonetheless tempt some PE managers to make an exit. After all, the sale of successful German niche providers to foreign strategic investors wishing to expand is regarded as particularly attractive. Yet precisely this exit route could be rendered more difficult for political reasons, due to the new Foreign Trade and Payments Ordinance which came into force on 18 July 2017. It allows German government agencies to take a more critical approach to the sale of German companies to foreign buyers, and also makes it easier to prevent such sales. The PE industry is still coming to terms with the new regulations, with almost half of respondents saying they are currently unable to assess the potential impact. “It is essential to consider whether the target company itself operates a business which is affected by the new Foreign Trade and Payments Ordinance, particularly when planning a transaction, and whether a purchaser falls under the new Ordinance. Any investigation by the authorities could have enormous implications in terms of time,” warns CMS partner Schneider.