According to the quarterly German Private Equity Barometer published by KFW Research in cooperation with the German Private Equity and Venture Capital Association (BVK) and Deutsche Börse Venture Network, the business climate in the German private equity market has cooled significantly since the start of the year.

The business climate has "literally collapsed" as a result of war and fear of inflation. While the VC business climate "slumped," the private equity business climate actually slid into the negative. "The VC business climate really collapsed in the first quarter of 2022. This certainly has to do with the high inflation rates and the tightening of interest rates by international central banks. Added to this are the geopolitical and economic uncertainties caused by the escalated war in Ukraine," says Dr. Fritzi Köhler-Geib, chief economist at KfW. However, she points out that this "shock of events" has not yet been acutely reflected in a decline in investment activity. For example, more than EUR 3 billion in venture capital has already been invested in German startups in the first three months, which would represent an increase on the same quarter of the previous year. "Investment activity in the VC market is expected to remain stable, partly because investors are still sitting on a lot of capital. On top of that, the war's impact on energy supply might even increase interest in clean and climate tech startups." Ulrike Hinrichs, managing board member of BVK, added: "The mood in the economy and on the capital market is characterized by the war in Ukraine as well as a high inflation rate and the turnaround in interest rates that has been heralded. The German venture capital market cannot escape this either."

The sentiment among private equity investors appears to be even more clouded. According to their assessment, the economic climate is cooling drastically - even more so than in the Covid shock. On the one hand, this worsening economic outlook could lead to increased demand for private equity by SMEs (especially if access to credit becomes more difficult due to the turnaround in interest rates); on the other hand, it could also "de-qualify" demand from the investor perspective, as the authors of the barometer call this financing pressure due to worsening interest rate framework conditions. In view of this situation, investors' willingness to invest has declined significantly in recent months, which is reflected in a correspondingly sharp drop in the indicator.