Private equity panel 2020/II survey by CMS and Finance: Transactions picking up – new mid-market buying opportunities

Frankfurt/Main – The German SME market could offer new buying opportunities for private equity firms during the coronavirus crisis as transactions pick up again after the recent sharp declines. A combination of appealing valuations and major corporations looking to divest businesses means the private equity industry is set to make a comeback, with investment managers also regarding purchase prices as significantly more attractive. That is a key finding of this year’s second 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.

PE managers see their chance thanks to attractive purchase prices

When surveyed in spring, at the height of the coronavirus crisis, private equity firms were negative on purchase prices, but the latest survey paints a rather different picture. Back in March, purchase prices were rated 3.57 on a scale of 1 to 10 (where 1 is expensive and 10 cheap), but that figure rose to 4.58 points in the autumn survey. More than 87% of the PE managers surveyed also see themselves on the buyer side – the highest level since inception of the panel in 2010. Dr Jacob Siebert, Private Equity partner at CMS Germany, said: “It’s only natural that PE funds will seek to invest the money they have raised, especially given that the previously high prices are starting to crumble.”

Software replaces healthcare on wish list

The panel members’ assessment of purchase prices has also led to a shift in targets, with the healthcare sector losing its popularity crown to software and IT companies. The respondents currently only rate healthcare at 8.08 on the attractiveness scale, out of a possible 10 points. That represents a decline of 2% compared to spring, when healthcare systems were very much in the public eye. Companies specialising in software/IT, meanwhile, moved up 7% to 8.71 points. The biggest gainer was the service sector, whose attractiveness rating leapt a staggering 26% to 7.38 points. At the other extreme, automotive remains out of favour. The industry’s attractiveness is flatlining at just 1.88 points, with no sign of any improvement. “The automotive sector was already under pressure prior to the crisis – politicians are providing substantial support for e-mobility and environmental issues, so the situation with regard to the core areas in particular hasn’t really changed,” said PE partner Siebert.

Variable purchase prices experiencing a renaissance

Even though many target companies are affected by coronavirus-induced disruption of their trading figures and business plans, 92% of the surveyed PE panellists state that fair purchase prices can still be found. Respondents believe that variable purchase price arrangements are one of the main reasons. A hefty 88% of participants are seeing the return of such clauses, which are a feature of deals in turbulent times.

“Earn-outs, i.e. purchase prices that are dependent on the target’s future performance, are obviously the classic way of reconciling valuation differences between buyers and sellers. But they are not a cure-all, especially at this time – in many cases, it’s still impossible to tell how big a toll coronavirus will take on corporate balance sheets,” said Dr Tobias Schneider, Private Equity partner at CMS.

Panel members see carve-outs as a source of good investment opportunities in the year ahead, based on the belief that many companies are being forced to take a long, hard look at their portfolios. In contrast, PE managers are less enthusiastic about struggling firms and those under pressure to raise funds. Only 42% of respondents see investment opportunities over the coming year in companies undergoing restructuring, while just 38% are positive about businesses that need substantial funding. “Not many players can handle distressed M&A. PE firms without a track record in this field should think very carefully about whether to invest in a faltering company. The time and effort needed to support such companies is usually much greater than for healthy businesses,” warns CMS partner Dr Tobias Schneider.

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