Private equity panel surveyed by CMS Hasche Sigle and FINANCE: buy-out financing market starting to unfreeze

Frankfurt/Main – Access to buy-out financing is easing again for leading private equity investors in German SMEs. That is the conclusion of the latest survey of the private equity panel organised by CMS Hasche Sigle and FINANCE. PE managers now assess the attractiveness of financing terms on average as around 15% better than at the beginning of February.

The availability of acquisition loans has improved even more than financing terms, with a rise of almost 23% in the assessment. This suggests that an increasing number of buy-out financing arrangements on reasonable terms have recently become possible again. Dr Tobias Schneider, partner at CMS Hasche Sigle, feels that these indicators are positive but the signals are still mixed: "While it is true that the banks appear to have regained their appetite for financing acquisitions, credit terms are still viewed as unattractive in many cases. This is having a dampening effect on deals."

Exit strategies is nevertheless a topic on most agendas, with 54% seeing next year as the best time for selling and only 16% looking to later than 2011. Together with the significant easing of access to external capital, it seems likely that the German private equity market will rebound significantly within the next few months.

Earn-out clauses could be one of the technical catalysts for this upturn. The responses show that earn-out clauses are commonplace in the German private equity arena. "There is still a gap between the price expectations of vendors and purchasers. Earn-out clauses are often a good way of dealing with that disconnect," notes Schneider. "A portion of the purchase price then depends on the future performance of the target company and is only paid if agreed targets are met. The problem with earn-out clauses lies in adequately protecting the interests of both purchaser and vendor, since the vendor is generally no longer in a position to influence the target company's business activities."

Despite these difficulties, earn-out clauses have only rarely resulted in disputes between the parties in the post-Lehman era. Dr Joachim Dietrich, partner at CMS Hasche Sigle, explains why: "Previously, earn-out clauses were often used to enable the vendor to benefit from exceptionally strong performance of the target company. In practice, no earn-out payments were made. That has now changed – there will increasingly be cases where the issue is the amount, rather than whether to make an earn-out payment at all."

Those are the key findings of the May survey of the private equity panel that CMS Hasche Sigle consults three times a year in conjunction with specialist magazine FINANCE. The panel includes leading representatives of more than 50 different private equity funds that invest in Germany, ensuring broad coverage of the German private equity market.