Fears of an economic downturn are slowing business in the venture capital and private equity markets.
(Photo: dpa)
Frankfurt Sentiment among investment managers deteriorated significantly in the first quarter. The Ukraine war, the rise in interest rates and economic problems have led to a significant slump in the investor barometer both in the venture capital market (VC) and in the private equity segment.
The business climate indicator for the venture capital market – which, among other things, depicts the financing situation for start-ups – falls by 35 points to 7.2 points and thus remains only just positive.
However, the current development differs from the corona-related setback at the beginning of 2020 in two main points: Firstly, the decline is from a record high level, and secondly, the slump is nowhere near as strong as it was then. The investor barometer is created by the KfW development bank and the BVK industry association.
In the first quarter, the assessments of the economy, the level of interest rates, the climate for fundraising and the pressure to make write-downs fell the most in the VC segment. According to the lenders, stronger negative effects are to be expected from the interest rate turnaround by the central banks. This leads to lower prices for technology stocks, which ultimately affects the private markets and increases the pressure to write down.
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On the other hand, the investment managers see positively that the initial valuations for new investments are also falling. The relevant indicator has improved significantly and is the only one with a significant gain.
Rising interest rates are also likely to have a negative impact on fundraising in the long term, because institutional investors will then again see investment opportunities in interest rate products for VC funds.
“The VC business climate literally collapsed in the first quarter of 2022. This certainly has something to do with the high inflation rates and the tightened turnaround in interest rates by the international central banks. Added to this are the geopolitical and economic uncertainties caused by the escalating war in Ukraine,” says Fritzi Köhler-Geib, Chief Economist at KfW.
Investors have a lot of capital
Nevertheless, it can be expected that investment activity on the VC market will remain stable, also because investors still have a lot of capital. “In addition, the effects of war on the energy supply could even increase interest in clean and climate tech start-ups,” says Köhler-Geib.
“Should the turnaround in interest rates pick up speed and Europe follow suit, this should put further pressure on the valuations of listed tech companies and thus also non-listed start-ups,” believes Ulrike Hinrichs, executive board member of the BVK. The easing of the initial valuations, which have been viewed very critically up to now, and the deal flow, which continues to be rated positively, are pleasing, but only small consolation when considering the overall situation.
Parallel to the VC market, the business climate on the German private equity market weakened significantly at the start of the year. The business climate indicator falls by 27.5 points to minus 7.2 points. The generic term private equity stands for holdings in corporations and medium-sized companies, which can involve complete takeovers or minority holdings.
“Due to the unfolding events, the German private equity business climate cooled down significantly at the beginning of the year, just after it had resumed its old upward trend,” says KfW expert Köhler-Geib.
The war has further increased the tension in the partially broken supply chains. That depresses the mood of medium-sized companies and thus also of their investors. Despite the increased demand for capital, their desire to invest is now suffering.
“The turnaround in interest rates, the war in Ukraine and the gloomy economic outlook are massive factors of uncertainty that are weighing on the economy as a whole and on medium-sized companies in particular. This uncertainty is reflected in the decreasing ability to plan the business development of existing portfolio companies, but also in possible new investments by the investment companies,” says association manager Hinrichs.
In recent years there has been a steady inflow of funds into the private equity market. The asset class has been able to provide investors with significant excess returns compared to equities, according to a study by Golding Capital Partners. An analysis of the period between 2000 and 2021 shows that private equity delivers excess returns over a long cycle, says Oliver Gottschalg, professor at the HEC School of Management Paris.
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