Private equity panel surveyed by CMS Hasche Sigle and FINANCE: Private equity investors in sceptical mood at start of 2012

Frankfurt/Main – The German private equity market has yet to recover from the slump in the autumn, based on the evidence of several indicators from the private equity panel polled by CMS Hasche Sigle and FINANCE. The headwinds generated by the euro crisis and the stock market crash in the summer have had a major impact on private equity investors in German SMEs. Rather than making new investments, half of all participants in the survey intend to focus on their investors and fundraising this year.

The leading representatives of some 40 Private Equity firms who comprise the FINANCE private equity panel are particularly concerned about deal activity, specifically company sales (exits). The PE investors polled see a deterioration in three out of four exit channels compared to a year ago. They have essentially written off IPOs. On a scale of 1 (extremely bad) to 10 (extremely good), their expectation of being able to sell a portfolio company by way of an IPO in 2012 is a very low 2.13 points – half the previous year's figure of 3.82. "The success of the PE sector in 2012 will depend crucially on whether and when calm can be restored to the market. If settled conditions return soon – and things stay that way – 2012 may still be quite a successful year for the industry," believes Dr Joachim Dietrich, partner at law firm CMS Hasche Sigle.

The problem is that PE investors are experiencing a real credit squeeze. Both access to finance (down 10%) and loan terms (down 7%) have got worse since the last survey. "Banks continue to cause concern to PE investors," says Dr Tobias Schneider, partner at CMS Hasche Sigle. Dietrich adds: "Failing other options, PE investors will again have to finance transactions using equity only and hope for early recaps."

There are nevertheless signs that private equity investors could have the worst behind them. Business prospects for portfolio companies for the next twelve months were up 7% to 6.49 points in comparison with October 2011, a figure that is anything but recessionary.

The survey respondents believe flexible contracts could play a major part in reconciling these unequal trends. PE managers attach significantly greater importance to working on the details of the contract compared with a year ago. "In the current market environment, more emphasis is often being placed on flexible purchase price structuring," reports Schneider. "But great care is required when drafting these complex clauses in order to avoid disputes at a later stage."

There were substantial changes in the perceived attractiveness of individual sectors for new investment. The biggest winners were the software and IT industry (plus 18%), trade (plus 15%) and electronics (plus 15%). Service companies remain the most sought after, with panellists giving them a 5% higher rating than four months ago. The biggest loser was the renewable energy sector. Battered by price wars, it saw a 12% fall in favour. This pushes cleantech companies down to 12th place out of 15 sectors. In May 2011, shortly after the nuclear accident in Japan, they were considered the second most attractive industry. Financial services is the second-largest loser, down 13%.

Those are the key findings of the autumn survey of the private equity panel polled three times a year by CMS Hasche Sigle in conjunction with specialist magazine FINANCE. The survey covers 40 private equity firms that invest in German SMEs.

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