Claims that the development of the German private equity markets in 2002 was basically a repetition of their development since 2000 are somewhat misleading, according to Holger Fromann, managing director of the Berlin-based BVK, the German Venture Capital Association. “The trend towards a decrease in both the volume and actual number of investments is what this refers to. Overall, we did observe quite a few changes to the German private equity and venture capital markets,” he says. “There were higher volumes of initial investments compared to follow-on transactions but fewer actual investments. This is the result of a slump in company valuations, making follow-on investments less attractive. And we saw a dramatic decrease in the number of seed investments last year as many companies are restructuring financially.”
Fromann says the overall fund raising figures are also down on previous years as the problems besetting the equity markets take their toll. “This situation isn’t helped by the continued lack of clarity over the way fund raising activities are taxed here in Germany. Until the legal framework surrounding taxation of funds is amended, institutional investors and international players alike are unlikely to return to the private equity market in the next few years,” he says.
Speaking of institutional investors, Fromann says insurance companies have lost a lot of money and the new pension funds in Germany are unlikely to opt for private equity as an asset class for the time being. “Insurance companies have lost quite a bit as they invest heavily in private equity and the new pension funds became operational as the equity markets began to slump. So they will be cautious and reluctant to invest in private equity at the moment.” However, he believes in the longer term, insurance companies will recoup their losses and return to private equity investing.
Walter Moldan, a partner at Henderson Private Capital in Munich, says now would be a good time for institutional investors to invest in private equity as valuations are down and companies therefore cheap. “Over the long-term period, the macro-economic situation will improve and the equity markets will recover. But pension funds and insurance companies are traditionally conservative and the recent stock market slump has made them more cautious. The venture capital area is particularly difficult to asses right now,” he says.
Moldan claims that whereas just 18 months ago, pension fund providers such as the new funds and insurance companies were proactively looking to increase their private equity exposure from an average 2% to as much as 5%, many are now thinking of reducing it. “It’ll probably be a few years before we see the levels of confidence and optimism that we saw a couple of years back return to the markets,” he adds.
Moldan says there is money to invest but it has become a question of quality rather than quantity. “The new pension funds have money to invest but they are inexperienced and don’t perceive the current economic situation as a good time to spread their money around.”
The overall feeling is that 2003 will not be any better for private equity in Germany, but both Moldan and Fromann say the industry is prepared for it and there is no real sense of panic.
Over the border in Austria, despite changes to the legal framework paving the way for pension funds and other institutionals to increase their private equity portfolios, the stock markets declines are having a similar knock-on effect as in Germany. “There is much less panic here than in Germany and whilst investment possibilities look good, pensions and insurance providers remain conservative. They are reluctant to invest more heavily in private equity markets even though recent legislation has made it easier for them to do so,” says Johannes Krahwinkler, a partner in Vienna-based Capexit.
Krahwinkler says the early stage and start-up markets are particularly slow at the moment, whilst second stage investments are doing much better. “Companies in second stage investments tend to be bigger and more profitable. However, it must be noted that whilst this area continues to expand and there a lots of potential deals, there is a question mark over their quality. We are talking quantity not quality, This is why many investors are holding back, even though they have cash to spare.,” he explains.
Krahwinkler believes this is a good time to get into private equity but the problem lies in convincing institutional investors that it is.
Thomas Jud, managing director of the Austrian Private Equity and Venture Capital Organisation (AVCO), says he has observed two major changes in the way the Austrian private equity market is developing. “Firstly, we saw a shift in focus during 2002 towards later stage financing with more and more private equity investments accompanied by mezzanine instruments. This means the financing of companies is becoming increasingly restructured. Secondly, money is going to experienced management teams rather than ‘good ideas’. Investments are no longer driven simply by expectations for high returns but by the presence of high quality assets. The prospects for the market long-tern remain good, though overall Austrian private equity has suffered from the slump in the equity markets”.
The Swiss private equity market has also been affected by the falls in the equity markets, but Peter Pfister, vice president of LGT Partners in Pfaeffikon, says the impact is more indirect than direct. “The Swiss private equity market is still young. Investors are still getting in rather than getting out,” he says.
Furthermore, he believes it is pointless trying to isolate the problems currently encountered by pension funds and other institutionals vis-à-vis their private equity exposure. “Institutional investors are facing problems with their equity portfolios anyway and private equity isn’t really uppermost in the minds of investors looking for fresh opportunities at the moment. But pension funds that invested in venture capital in the past are certainly beginning to feel the pressure,” he says, adding that institutional investors are likely to observe the stock market performance of listed investment companies before deciding whether or not to include private equity in their allocation strategy.
“2003 is likely to be a slow year, a year of transition rather than one of big deals. Conversely, however, opportunities are good, since companies are cheap. But venture capital is not a good place to be at the moment, as new money is hard to come by,” says Pfister, claiming there is still plenty of ‘old money’ around in Switzerland, particularly flowing through the small and mid-sized company buyout market.
Urs Wietlisbach, chairman of Zug-based Partners Group, says that many pension funds would have been in a better position to deal with the current crisis surrounding their private equity portfolios had they sought proper advice before entering the market in the late 1990s. “Many pension funds have had their fingers burnt. They didn’t seek advice from consultants and used inexperienced internal managers. They have now realised quality is better than quantity. Turning the situation around by outsourcing the management of their private equity investments as well as seeking advice from specialists is a trend we are likely to see develop throughout 2003,” he says.
However, Wietlisbach believes the reluctance of pension funds to further increase their exposure to private equity is only likely to be short to mid-term. “The feeling among pension funds right now is to avoid private equity but that won’t always be the case.” He adds: “The key will be the performance of listed investment companies which they are watching very closely.”

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