Having recently returned from Germany, I was quite surprised to learn that record Covid-19 daily case counts (37.1k) were set there last week – twice. Notwithstanding the current political turbulence with three parties attempting to build a governing coalition after recent federal elections, everything seemed in good order with relatively robust investment activity. While it certainly appears that the Social Democrats (SPD), the Free Democrats (FDP), and the Green Party will come to an accommodation, there are real debates about reducing Covid-related stimulus and whether to start to limit expansionist policies.
The somewhat unsteady economic indicators are not helping. Industrial production declined 1.1% in September over the prior month, which had declined 4.1% in August. With unemployment now at 5.4%, supply chain issues continue to hamper the recovery. The Halle Institute for Economic Research, one of Germany’s leading research firms, recently reduced its 2021 GDP growth forecast from 3.7% to 2.4%, and now expects the German economy to not reach pre-pandemic employment levels until 2023.
Furthermore, there are significant debates roiling the broader European Union. Over the next two years most of the major countries in the EU will have national elections which, like in Germany, could see fundamental political changes. Today, for instance, Poland is aggressively challenging a number of EU laws which the country’s leadership considers to be in opposition of Poland’s national interests, perhaps threatening the sanctity of the EU altogether.
Against this backdrop it was encouraging to see the level of venture capital investment activity across Europe by American investors, who appear to be convinced of the attractiveness of that market. Pitchbook recently announced that through 3Q21 US VCs participated in 50.8 billion euros ($58.9 billion) rounds of financings in European companies. It is estimated that 21.2% of all European deals in 2021 had at least one U.S. investor in the syndicate as compared to 17% in 2020 and 15% in 2019 – a marked increase in U.S. participation. Could not help but think that the dramatic liquidity created in the U.S. may now be spilling into other important markets.
Consistent with what investors are witnessing in the U.S., there has been an explosion in exit activity across all of Europe as well. Through 3Q21, it is estimated that there have been in excess of 12k M&A transactions which is driving nearly 120 billion euros of exit value across Europe. Notably, much of this activity is being driven by robust public listings; leveraged buyouts tend to still be a rather inconsequential source of investor liquidity. The 2021 exit levels are likely to be nearly 5x that of 2020.
Data: Pitchbook, Axios
According to BVK (the German Private Equity and Venture Capital Association), nearly 1.9 billion euros of venture capital was invested in 654 German companies in 2020, which was a marked decline across all stages from 2019. Quite surprisingly, less than 6% of all investments were in seed stage companies. One might expect that there may be a future resurgence of entrepreneurial activity given the dramatic influx of immigrants over the last handful of years. In 2015, Angela Merkel facilitated the resettlement of nearly one million immigrants, making Germany the second most welcoming country in the world. Importantly, it is thought that nearly 25% of all Germans have immigrant roots. As has been proven in other innovation hubs, robust immigration policies often lead to strong entrepreneurial ecosystems.
Given the impressive technical capabilities of both the academic and industrial sectors in Germany, one might have expected a greater level of novel intellectual property licensing to early stage companies. As shown below, according to analysis prepared by Frontline @ SpeedInvest, Germany is a powerhouse in terms of the number of patents filed each year.
German venture capitalists have historic strengths in industrial automation, cleantech, and increasingly, in healthcare, most notably in medical technologies. Notwithstanding those attributes, according to BVK data, the German venture capital industry raised less capital in 2020 (1.6 billion euros) than it did in 2019 (nearly 3.0 billion euros). Of the various private capital asset classes, venture capital is consistently the largest segment of overall fundraising, which may be poised to increase dramatically. Earlier this fall, German-based World Fund set out to raise the largest European cleantech fund, targeting 350 million euros.
Healthcare has been one of the most important sectors of the German economy. Overall healthcare expenditures in 2019 were estimated to have been 410 billion euros or 12.5% of GDP. The German medical technology sector is thought to be $35.8 billion in size and accounts for more than 25% of the entire European industry, according to Germany Trade & Invest. Of the more than 83 million Germans, it is believed that 7.5 million of them are employed in the healthcare industry.
As is the case in many other developed countries, the digital healthcare sector is witnessing explosive growth. Germany Trade & Invests estimates that the sector will be 57 billion euros by 2025. All of the urgency exhibited by providers and payors in the U.S. healthcare technology sector triggered by the pandemic are appear to be evident in Germany. Furthermore, the German legislature instituted a series of reforms that have facilitated the advancement and adoption of this important sector. In particular, there were three important pieces of legislation: the 2019 Digital Healthcare Act, the 2020 Hospital Future Act (KHZG), and the 2021 Digital Care Modernization Act.
In addition to meaningful financial incentives of 4.3 billion euros to accelerate the adoption of digital solutions for providers (EMRs, etc), important reimbursement frameworks were established for digital therapeutics. The push for the German healthcare system to be more virtual, more responsive, more intelligent, and more predictive should have profound benefits for the population.