These two countries are often lumped together in the Benelux but the Netherlands and Belgium have different cultures and economies. The Netherlands is a much larger outward looking economy. There are numerous Dutch international companies such as Unilever and Shell. Belgium has far fewer international companies than its neighbour and its division between French and Flemish speaking regions has made its economy more fragmented.
In the Benelux countries buyout activity was dominated last year by large transactions in the Netherlands, one of Europe’s most mature private equity markets. But there is also increasing interest in Belgium, which is now regarded as having one of the best legal and tax environments for investment.
Most of the private equity activity in the Benelux countries is focused in the Netherlands, although activity is growing in Belgium. Luxembourg’s tiny size means there are very few transactions there of significant scale.
Last year the Netherlands witnessed a number of large deals. These included the €8bn sale of
In Belgium large deals were much thinner on the ground. Among the significant transactions there were
Total deal value in the Netherlands was around €25bn, says Alex Shivananda, head of HgCapital’s Benelux office in Amsterdam. “It’s been very busy in the Netherlands and we’re seeing more public-to-privates,” he says.
Robert Thole, managing director of mid-market private equity house Gilde, which spun out of Rabobank in 2005, says the Netherlands is a developed private equity market whereas Belgium is still in the process of developing. “People often lump the countries together in the Benelux but the Netherlands and Belgium have quite different cultures and economies,” he says.
The Netherlands is a larger economy and one that has historically been very outward looking and trading-oriented. There are numerous Dutch, or part-Dutch, international companies, such as Philips, Unilever and Shell. The Netherlands also has a highly developed banking and capital markets system, with banks such as ABN AMRO and ING.
Belgium has far fewer international companies than its neighbour and its division between the French and Flemish-speaking regions has made its economy more fragmented.
“Because the Netherlands has more large conglomerates, there are more buyout opportunities through companies being spun out,” says Thole. He says that
As a regional player, Gilde aims to source deals through its local contacts with company owners, management teams and M&A advisers. It has particular expertise in some sectors, such as food, but invests across different industries, says Thole. Among its investments in the Netherlands last year was the acquisition of shrimp processing and distribution company Heiploeg. In Belgium Gilde, with CVC, acquired fencing manufacturer Bekaert Fencing.
Last year Gilde closed its third buyout fund and the first as an independent house, raising its target of €600m. Thole says: “A lot of the private equity money being raised is still going to the very large funds but we think there’s still an appetite for national or regionally focused funds, where the fund managers have good contacts on the ground.”
Despite, or perhaps because of, the high level of buyout activity there has been a major debate in the Netherlands about whether private equity is playing a positive role in the economy. In an echo of comments made by a German politician, last summer the Dutch minister for the economy warned that some investment funds were behaving “like locusts devouring one company after another”. The comments came after two activist hedge funds called for the break-up of Dutch retailer Ahold.
According to Andries Mak van Waay, a partner at
Robert Thole of Gilde agrees that there was some confusion in the way the discussion was carried out in the media: “It was a generalised debate about institutional investment in the Netherlands, focusing on shareholder activism and the role of hedge funds, but the lines between these funds and private equity became rather blurred.” He adds that it was transactions such as the take-private of VNU that triggered the controversy: “When people see large, quoted companies like VNU taken private they start to ask questions about corporate governance and regulation, but it’s not the sort of fierce criticism that has been seen in Germany.”
The future for take-privates is being thrashed out in a Dutch court, with activist hedge funds
The confrontation highlights the differences between what many see as an Anglo-Saxon model in which shareholders have complete control and the Continental European tradition of consulting all stakeholders. Johan Kleyn, a partner at law firm Allen & Overy in Amsterdam, says the case is highly significant: “The court’s decision requiring Stork to withdraw its poison pill is important and the case will indicate how far hedge funds can go in acquiring listed companies.”
Kleyn says that he expects the trend for ever-larger buyouts to continue in the Netherlands. “What is driving the market is the huge sums of buyout money available and the fact that the Netherlands has quite an open economy and capital markets,” he says. But there are some fears in the market about what will happen if there is a significant change, such as rising interest rates. “There’s a feeling that the banks may try to reduce levels of leverage because some of the banks came under pressure in the recent public debate on private equity,” says Kleyn.
Despite the controversy around shareholder activism, Gilde’s Robert Thole says he expects that there will be more PTPs in the Netherlands. “We’re working on one right now,” he says.
One of the main factors holding back the growth of the PTP market, says PwC’s Andries Mak van Waay, is the fact that such transactions tend to be quite complex: “You’ll often find that a private equity house is keen on one or two bits of a quoted company but not all of it, which means there needs to be a fairly large restructuring post-acquisition.” This can be seen in the acquisition of VNU in early 2006 by a consortium including KKR, Carlyle and Blackstone. At the end of 2006 the consortium negotiated the sale of the magazine arm of VNU to 3i, while holding onto the more lucrative market research part of the company.
While not strictly a PTP, one of the possible deals in the pipeline is the sale of
In recent years deals such as Organon have attracted a growing number of international houses to set up shop in the Netherlands. “We opened our office here two years ago because we wanted to be closer to the market and to build a network,” says
This increased competition makes it harder to pick up bargains, says Shivananda: “It’s a mature market that is well advised and where vendors have become smarter,” he says. HgCapital and some of the other houses with Dutch offices will run their Belgian operations from the Netherlands. Others will cover Belgium from London or Paris.
Andre-Xavier Cooreman, chairman of the Belgian Venturing Association (BVA) and chief operating officer of private equity house
Among Sofinim’s investments last year were taking a stake in truck trader and repair company Turbo’s Hoet and in particle board and flooring company SpanoGroup.
He says that the country is gradually maturing as a private equity market but that there is still suspicion of private equity among many family-owned companies: “They see private equity as being about asset-stripping and over-leveraging companies.”
Because of this, venture capital or private equity houses approaching Belgian companies in an ‘Anglo-Saxon’ way are likely to fail, he says. “It’s important to approach companies from an industrial rather than a financial perspective and to show you are interested in developing the company and not just seeing it as an asset.”
This is particularly true in the southern, French-speaking part of the country, where companies tend to be smaller and where trade unions are more powerful.
Despite these obstacles, Belgium is likely to provide an increasing flow of transactions, he believes, and there are other positive trends such as the buoyancy of the Belgian IPO market.
“Belgium is gradually becoming more open to private equity and venture investment, but it’s important for investors to understand the hesitancy among some family owners of companies,” he says.
Belgium – Climbing the rankings
While Belgium is a much less developed private equity market than the Netherlands, it is becoming increasingly attractive, according to an EVCA study. The EVCA’s 2006 benchmarking study draws comparisons between tax and legal environments across 25 European countries. The research attempts to illustrate how different countries encourage the development of private equity and venture capital and incentivise entrepreneurial activity.
The rankings for 2006 have Belgium in fourth place, behind Ireland, France and the UK. Behind Belgium were Spain, Greece and the Netherlands. In 2004 Belgium was in seventh place.
According to the EVCA report, over the past four years Belgium has made many positive changes to its tax and legal environment for private equity and venture capital. Pension funds and insurance companies can invest in private equity, while an investment vehicle, PRICAF, was specifically launched for investments in non-quoted companies.
The country also offers tax incentives for individuals who invest in private equity and venture capital through a new programme called ARKimedes, which was launched in the Flemish region in 2005 to stimulate investment in small, innovative companies.
With ARKimedes the Flemish Government aims to double the flow of venture capital to growing companies via professional investment funds, which can obtain up to one euro from the ARKimedes fund for each euro they invest in a Flemish small or medium-sized company.
As well as this programme, Belgium offers a broad range of research and development tax incentives, according to the EVCA.
But it is not all positive. When it comes to holding onto talent in investee companies and management funds, Belgium could do better, finds the EVCA. Although it supports the fact that capital gains made by individuals are normally tax exempt, it points out that Belgium is a high-rate income tax country;the income tax rate for private individuals can be as high as 54%, well above the European average of 42%.
According to Will Van Tongelen, an associate at law firm DLA Piper in Antwerp, one of the main obstacles for private equity investors from a tax and legal perspective is the absence of tax consolidation. The lack of a system of fiscal consolidation means that the financing costs related to an acquisition cannot be directly deducted from the business profits. However, in practice there are some alternatives which can enable a push-down of debt, such as special dividend distribution, capital reduction, merger, or payment of director and management fees.
The main market obstacle facing private equity, says Tongelen, is the increasing competition between the main buyout players in a relatively small market, as most of the Belgian buyout market is concentrated in the Flemish region.
According to DLA Piper partner Erwin Simons, although Belgium is a small market it is becoming increasingly attractive to private equity investors. One of the main reasons for this, he says, is because of the large number of family businesses that need new capital to finance growth, in order to remain competitive in the European market.
Simons says: “Belgian family shareholders have learned to appreciate what private equity can offer them in areas such as providing an exit route, financing growth and international presence, and offering the expertise and skills needed to expand abroad.”
Simons notes that the Government has been actively trying to improve the corporate tax regime. At the beginning of 2006 Belgium made the corporate tax regime more attractive to private equity investors through a measure known as notional interest deduction, or deduction for risk capital. This tax deduction is aimed at reducing the difference in tax treatment between debt funding and equity funding, allowing companies to deduct more of their equity funding.
Simons says that when it comes to structuring management packages in Belgium, the US practice of issuing convertible shares as part of the incentivisation has until now been relatively rare.
At first glance, he says, convertible shares seem to conflict with the principles of capital protection under Belgian law because they involve the issuance of new shares without new contribution to the company’s share capital. But, says Simons, there are ways of structuring such packages that enable convertible shares to be used in a way that does not contravene the law.
The EVCA’s comments on the environment for private equity in the Netherlands were also largely positive. It particularly highlighted the very favourable pension fund environment, with many occupational pension funds being active investors in private equity and venture capital.
The report also flagged up that in the Netherlands not only could pension funds and insurance companies easily access private equity, but that there were also several appropriate domestic fund structures. On the negative side, the report argued that improvements could be in made in respect of encouraging start-ups and in fiscal research and development incentives. The Netherlands was below the European average in retaining talent in investee companies and management funds. This was due to factors such as income tax rates as high as 52%.