Frankfurt/Main – The next deal wave is on the way and the booming private equity market is set to reach new records. That is the key finding of the latest private equity panel survey, which is conducted three times a year by CMS Germany and FINANCE magazine. More than 50 different private equity (PE) firms in the German SME sector provide assessments of the market for the survey. 65% of the respondent firms intend to spend even more time assessing new investments than in the previous year – the highest proportion since the panel was formed. The hunger for deals seems far from sated, with the strong outlook also leading to more acquisitions and integrations as portfolio companies are developed. An unprecedented 59% of respondents are budgeting even more time for such add-on acquisitions.
Dr Tobias Schneider, a partner at law firm CMS, said: “It’s naturally not just the banks, advisers and other parties involved who are delighted at the prospect of even more deals this year compared to 2017, which was itself a record year. Sellers are also major beneficiaries because sustained growth in demand for targets will surely push prices higher.”
More straightforward for sellers
The record-breaking momentum seen in the previous year continues to play into the hands of PE firms in 2018, with a large chunk of the deal flow having its origins there. On a scale of 1 to 10, vendors falling into the private equity funds category reached a new record high at 8.22. Half of the surveyed PE managers also expect there to be even more secondary and tertiary buy-outs in 2018, i.e. the sale of a majority stake in a company to another private equity investor. These are good prospects, commented CMS partner Schneider: “When a private equity investor buys from another private equity investor, it may also be a boon for the target, since often the resources of one investor are exhausted and the new investor can provide new impetus for ongoing growth of the company through fresh funding or an international network.”
The continuing boom is also reflected in the provisions seen in purchase agreements, since the eagerness to invest among virtually all market players is likely to result in more seller-friendly contract clauses. This applies in particular to compensation for failure to close the transaction (break-up fees) and lists of guarantees which leave some of the purchase risk with the seller. CMS partner Dr Jacob Siebert added: “Everything points to a continuation of the existing seller’s market. If this is now going to be reflected more prominently in the documentation, due diligence will be even more vital, especially in the case of insured deals.”
Non-bank financing continues to gain in importance
The fierce battle between private debt funds and banks continues to dominate leveraged finance transactions. The trend away from conventional financing options is also evident in the latest PE panel survey. On a scale of 1 to 10, financing conditions reached a new record high of 7.97 points. Competitors who collect money from private and institutional investors for the purpose of providing debt capital have taken one third of German banks’ new business away from them to date. Private investors benefit from more aggressive deal structures and borrower-friendly contract terms. Having said that, the banks are also adapting their strategies. Since last year, banks have been entering the fray more self-confidently with new credit terms. CMS partner Siebert commented: “Competition among finance providers can only have a positive impact on deal activity, with the result that the financing side will remain a major catalyst this year.”
The availability of borrowed capital for financing company acquisitions (buy-outs) also remains very good, at 8.49 points. This figure is only marginally below the existing record of 8.66. CEOs of private equity-financed companies are consequently bullish about 2018. A figure of 7.76 points marks a new record level, with the SME sector on a roll.
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