Dim prospects for German VC market

Deutsche Bank has published a research note on the German venture capital market, painting a bleak picture of the industry’s prospects going forward.

The report, entitled 'Germany's venture capital market: prospects remain dim',  predicts that investment volumes in venture capital in Germany will drop by more than 30 per cent to E3bn this year. This contrasts with E4.5bn invested in both 2000 and 2001.

Venture capitalists have also struggled to keep their portfolio companies alive in 2002. 65 per cent of all exits were write-offs. Deutsche Bank said it expected German private equity firms to record losses “in the region of 50 per cent” this year, up from 36 per cent in 2001.

The research also points to the IPO market as both the cause of much of the current woes as well as the potential key to recovery, should it reopen. Of that there are no signs at present: Since the decline of Germany’s Neuer Markt, practically no venture capitalist firm in Germany has used flotation as an exit vehicle. “As long as the channel to divestment by IPO is blocked, trade sales and buybacks of passive holdings will be the most important exits,” Deutsche Bank said.

Whether the current problems are symptoms of a temporary downturn or indicative of a long-term “structural setback” was difficult to predict, given the relatively recent arrival of private equity as a financing tool and asset class in Germany. However, “poor market sentiment, the end of the Neuer Markt and the negative macroeconomic environment point to the latter”, the bank’s researchers concluded.

The findings concur with 3i’s quarterly European barometer published in September, which revealed that the most notable downturn in corporate confidence had occurred in Germany, falling to a new record low of -105, from -60 in the previous quarter. The barometer is based on a survey of managing directors from 3i's investee companies.