Frankfurt/Main – The economy is firmly in the grip of the coronavirus crisis and the German private equity market is now also being massively impacted. Almost 86% of respondents in this year’s first private equity panel survey conducted by CMS and Finance magazine reported an extremely high number of deals falling through. More than two thirds of those surveyed also stated that planned add-on acquisitions had been put on hold for the time being. Purchase prices in M&A processes have also become far less attractive, according to the PE managers surveyed. Those are the key findings of this year’s first private equity panel survey, which is conducted by commercial law firm CMS and Finance magazine. More than 50 different private equity (PE) firms in the German SME sector provide assessments of the market for the survey.
Coronavirus crisis disrupting German private equity market
The coronavirus pandemic is cutting a swathe through German SME private equity. That is apparent in the availability of buy-out finance, for example. On a scale from 1 (bad) to 10 (excellent), the average survey result plummeted from 7.96 to 4.30 points. In contrast, the conditions attached to loans have deteriorated less sharply, according to the surveyed panellists. The figure here fell from 6.96 to 5.00 points. For the first time since the panel survey was launched, finance conditions are thus assessed more positively than the availability of loans. CMS partner Dr Jacob Siebert commented: “The interest rate environment itself has not changed, but there’s considerable uncertainty about how the coronavirus crisis will affect targets’ business models – so most players are keeping a low profile for now and sitting tight.”
Stress test for ongoing M&A processes
While planned M&A transactions have been put on the back burner for now, buyers and sellers are being compelled to adjust to the new reality. The buyer side in particular is facing massive slumps in their portfolio companies. Panel members rate the outlook for their business in the next twelve months much more pessimistically, at just 3.48 points (previously 6.16 points). Many PE managers are nevertheless venturing back onto the buyers’ side with a score of 6.83 points for tactical positioning (1 = seller, 10 = buyer). This marks the highest score in ten years. On the other hand, the surveyed PE managers believe that sellers’ purchase price expectations are depressing the market outlook, with a very low rating of 4.00 points on a scale of 1 to 10.
According to the panel, however, the PE industry is aiming to re-invigorate the market using crisis-tested M&A tools. More than three quarters of respondents are in favour of using MAC clauses, earn-outs and other purchase price adjustment clauses. 70% of those surveyed also attach great importance to assured finance as a closing condition. Dr Tobias Schneider, Private Equity partner at CMS, said: “Anyone wanting to do a deal at this time needs strong nerves and a solid contract that reflects the current uncertainty. Creativity in drafting agreements is particularly important now.”
Significant uncertainties around deal types
When asked about the future nature of deals, panel respondents are united in focusing on major companies. Expectations of sell-side activity by business owners and other private equity firms in the rest of the year have slumped by 33%, and in some cases by as much as 36%, compared to spring 2019. Group spin-offs, on the other hand, posted a 10% rise.
Investors are pinning their hopes on companies subjecting their portfolios to a critical review and selling non-core businesses and underperformers. “Now, as ever, corporate spin-offs are seen alongside primaries as a playing field offering quick wins that can deliver a fast profit – but care is needed, negotiations with major companies are often difficult, especially in times of crisis,” noted CMS partner Tobias Schneider.
Having said that, PE managers’ industry preferences risk becoming an impediment when private equity M&A picks up again. It is precisely the sectors where large companies have recently got into difficulties that are becoming unattractive to PE managers. The panel respondents consider new investment in the automotive, retail and engineering sectors to be the least attractive. Meanwhile, healthcare, software and telecommunications are up slightly and proving pretty stable, with record highs.
The fact that hardly any private equity managers seem to have the courage at this point to seek out investment opportunities in the hardest-hit areas of the economy could also contradict a second – essentially confident – view held by the Finance panellists. More than 60% of those surveyed strongly, or very strongly, believe that the coronavirus crisis will open up unexpected new acquisition opportunities for them. But will that include healthcare, software and telecommunications? “It’ll be interesting to see how things pan out – software and telecoms seem to be the logical winners in the coronavirus crisis, so there’ll be few opportunities there. That’s not necessarily the case in the healthcare sector, so the recent very high prices may soften somewhat,” said PE lawyer Siebert.
Press Contact
presse@cms-hs.com
