German VCs see brighter outlook in spite of finance crisis

While few investors can face the future with complete confidence in light of the world financial crisis, German VCs can at least say that the prospects for their industry have improved.

According to a recent report by Fleischhauer, Hoyer & Partners, a Munich-based private equity consultancy, which reviews the state of the German VC market each quarter, in the first nine months of 2008, the amount of capital invested in early-stage deals by German VCs rose 44 percent over the comparable period the previous year, to total €424 million. In the third quarter alone, German VCs made 140 investments, which is the highest number of deals in seven years. The quarter also saw 23 exits, many via trade sales and others via the sale of publicly-traded companies to larger competitors, such as the sale of biotech firm Jerini to British pharmaceutical company Shire.

“We can even speak of a strong recovery” in the German VC market, Götz Hoyer, partner with FHP Private Equity Consultants, told Science|Business.  For years, German VCs, in the wake of the technology crash of 2002, have faced a struggle to raise funds. With few domestic pension funds and insurance companies supporting the market, they have had a hard time explaining to foreign investors why they should put money into the German early-stage sector. 

But FHP Private Equity Consultants says that trend has turned around over the past two years.  Between 2007 and today, German VCs have been able to raise 13 funds with a volume of €1.4 billion.  The most frequent investors were fund of funds, banks, family offices and government entities. Pension funds and insurers have continued to shun VC investment, according to the 35 VCs polled regularly by FHP. 

Indeed government involvement in the early stage market has played an important role in keeping the market afloat. One of the top investors has been the Hightech Gründer Fonds, a subsidiary of the government-owned Kreditanstalt fuer Wiederaufbau.  According to FHP, government entities help finance nearly half of all early-stage investments in Germany. But Hoyer points out that many of these are not really classic “VC” investments, but rather more service-oriented Mittelstand companies.

One important trend that makes the outlook a little less rosy, says Hoyer, is the strong consolidation that has gone on in the German VC market. Investments are coming from only a few large players, with 60 percent of newly-raised capital in the hands of the top three players: Ventizz, Wellington Partners and TVM.  The top five firms manage to attract many more foreign investors, making up 85 percent of their funds, compared to only 25 percent for smaller players. For these remaining VCs, fundraising remains a hard process that can take over a year. 

Foreign investors also seem more eager or able to snap up promising German companies than domestic VCs in some cases. In the hot cleantech sector, Hoyer says, U.S. and U.K. firms have been active investors. Intel, for example, has invested in Berlin-based Sulphurcell, a company which makes components for solar photovoltaic cells, as well as a solar cell manufacturer called SpectraWatt. It will be interesting to see whether German VCs can use this period of expected lower valuations to catch up to their foreign counterparts.