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German VC: consolidation and losses characterise 2001

German Venture Capital Association, the BVK, has released the provisional figures for investments by its members last year. Dr Holger Frommann, managing director of the BVK, described 2001 as a year of consolidation among the private equity players themselves and their portfolio companies.

Although investments in 2001 (a total of 1,921 deals worth EURO4.3 billion) remained at the same level as 2000 (DM8.7 billion or approximately EURO4.4 million) last year’s figure is distorted by the inclusion of large buyouts in the survey. Previously the BVK’s statistics included only a few buyouts but this year major buyout houses including Apax Partners, CVC, EQT and Permira have joined the association. Of the EURO4.3 billion invested in 2001 new BVK members accounted for deals worth EURO1.1 billion.

The number and size of investments declined throughout the year, apart from the fourth quarter, when 500 deals worth a total of EURO1.9 billion were completed. Of these deals nearly 50 per cent were buyouts. Dr Frommann described the final months of 2001 as atypical.

Another feature of the year was a process described by Dr Frommann as the clearing out of portfolios by venture capitalists, who were forced to decide which investments to write-off and which to continue to support with further rounds. He believes this process, which usually persists for between 12 and 18 months, is approaching its end.

In a market where IPOs are nigh on impossible and trade sales struggle to meet expectations generated by high deal prices, write-downs accounted for 35.8 per cent of exits in 2001. Dr Frommann anticipates continued consolidation among the players, through both M&A activity and bankruptcy.

“The level of early stage investments fell in 2001 to 26.8 per cent of deals. This decline is not as dramatic as some people have been announcing, it’s not a crisis,” says Dr Frommann. He also observes a worrying breakdown in seed investments. However, the volume of expansion financing increased to meet the demands of the Mittelstand companies and buyouts accounted for 36.8 per cent of deals. Frommann expects to see a similar pattern of investment this year.

Large buyouts also changed the division of investments by sector in favour of more traditional industries. Deals such as the EURO3 billion acquisition of Cognis and EURO2.7 billion Messer Greisheim transaction mean the chemicals and materials sector accounted for 15.9 per cent of investment volume in 2001. Mechanical engineering with 11.7 per cent and consumer goods with 10.8 per cent also did well, while investments in communications fell.

Of the total invested by BVK members 69.9 per cent was in German businesses, a fall from last year’s figure. Foreign investment increased, reflecting both the association’s new members and continuing internationalisation of the private equity industry. Europe received 19.3 per cent of investment.

Dr Frommann predicts growth for 2002, although on a more moderate scale than that which took place between 1997 and 2000. He expects the clearing of portfolios to cease by the second half of the year and losses to return to more normal levels of less than 20 per cent. The long-anticipated and much hyped wave of German buyouts has not arrived and he believes vendors are waiting for higher valuations, as well as favourable legislation.