The business climate on the private equity market determined by KfW is declining by 19.5 points to -32.0 points. The current situation assessment has deteriorated significantly and business expectations have also worsened. The indicator for the current business situation fell by 26.8 points to -43.0 points and the indicator for business expectations declined by 12.3 points to -21.1 points.
Disappointing economic data is responsible for the clouded sentiment among private equity investors. With recurring uncertainty among (potential) portfolio companies, the assessment of deal flow also deteriorates. Recent interest rate increases also contribute to the setback because they worsen the availability and terms of the debt capital typically used for transactions.
Expectations for new commitments for the rest of the year are, however, quite positive. According to KfW’s assessment, one reason for this development could be that an end to the central banks’ interest rate increases is slowly coming into view. While this doesn’t change the actual interest rate level, negative sentiment is less related to the level than to the speed of the interest rate turnaround.
Ulrike Hinrichs, managing board member of the German Private Equity and Venture Capital Association, says:
“The overall economic environment has stifled the tentative mood recovery of the two preceding quarters. Uncertainties regarding the economic development of both portfolio and potential target companies are likely to have intensified and are thus relentlessly weighing on sentiment. Only when economic concerns and interest rate increases no longer burden the market will sentiment substantially improve. Then assessments of deal flow and transaction financing will also brighten up again. However, challenging times do offer attractive entry opportunities or add-on opportunities for existing portfolios on the investment side. The consistently positive assessments of entry valuations underscore this.”
