Frankfurt/Main – Despite the ongoing pandemic and a mixed last year, the private equity industry is undergoing a renaissance. 2021 looks set to be a strong year for private equity transactions involving German SMEs. Three long ignored target sectors – retail, engineering and cleantech – appear to be experiencing a revival. Those are the key findings of the latest 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.
Deals and capital are bubbling up again
In spring 2020, market fear and caution dominated the panel’s findings. This year is different. Assessed on a scale of 1 (low) to 10 (high), the panel members expect private equity colleagues on the seller side to be very active, with the score of 7.52 points being up almost 60%. At 6.58 points, the anticipated sell-side activity by businesses represents an increase of 50%. CMS partner Dr Jacob Siebert commented: “After a lot of deals were seen in the last quarter of 2020, the first quarter of 2021 also got off to a real lightning start, with unusually high deal activity right from the first week.”
New investments already pencilled in
New investments are at the very top of respondents’ to-do list this year. Around 55% of panellists plan to spend more time on this. Looking at add-on deals, the figure rises to more than two thirds of those polled. Only 33% state that they are working on exits. Accordingly, further growth of their portfolios is on the cards for many firms. “Thanks to an ongoing shortage of investment alternatives, the inflow of new funds continues unabated. This money now needs to be invested,” said CMS partner Siebert.
The software and healthcare sectors remain firmly at the top of the popularity scale for panel members, with scores of 8.94 and 8.62, respectively. However, three sectors are now coming back onto panellists’ radars.
Engineering, retail and cleantech back on the shopping list
The renewable energy, retail/e-commerce and engineering sectors are all back on the radar for panel members. Compared to the last survey, (online) retailers in particular posted a 64% increase to reach 6.38 points, a level not seen in more than ten years. The renewable energy sector was up 30% to 6.21 points, while engineering climbed 26% to 5.03 points. This suggests that the industry preferences of PE investors in the German SME sector are broadening again. “The strong appeal of software and healthcare assets will likely remain in place for the time being. Yet the chances of PE investors getting their hands on an asset of this type are rather slim, even if they accept the very ambitious valuations. So investors will have to look around for other industries that are doing well despite the Covid-19 crisis, or precisely because of it,” said CMS partner Dr Tobias Schneider. It is not entirely clear whether corresponding financing options will be available, though. Even prior to the pandemic, there was major variation in the environment for buy-out finance in the German SME sector. In the current survey, the figures of 7.68 points for availability (up 23%) and 7.09 points for financing terms (up 22%) do point upwards, but fail to reflect the clear segmentation of supply. CMS partner Schneider commented: “Banks and debt funds don’t measure all assets by the same yardstick. Even less compelling investments can be financed. But you have to allow a bit more time to get the funding package in the bag.”