Going down the food chain

The Belgian market has been less affected by the credit crunch than some other countries, largely due to the fact that it has traditionally been focused on the mid-market or smaller deals. In the Netherlands, where larger deals were more common, the top end of the market has been hit but there is continued activity in the lower and mid-markets.

Tjarda Molenaar, director of the Dutch private equity and venture capital association, the NVP, says: “Last year was a record one for the Dutch market, although we saw a fall in the number of very large deals in the second half. But there are still smaller transactions taking place and overall we expect to see a similar number of deals in 2008, but lower financial volumes.”

In 2007 equity investment in transactions by Dutch-based PE and VC firms was around €4bn and that figure rose to €5.4bn when overseas funds investing in the Dutch market were included, according to the NVP. In general, Molenaar says she is optimistic about the longer-term role of private equity in the Dutch economy. “Currently the banks are cautious on lending, but I think that when the liquidity crisis eases the banks will return to backing private equity deals because the current problems are not about private equity but rather about the general lack of liquidity.”

Menno Antal, head of 3i’s office in the Benelux, says there is still significant deal flow in the lower mid-market, up to €300m to €400m and a few deals in the €500m to €1bn bracket. “Deal flow is actually higher than I’d have expected, given the wider environment, but there’s a question mark over how many of the deals under consideration will close.”

His concern about the closing of deals is due to the fact that many vendors have not recognised in their valuations the changed situation. Another potential barrier to closings is the availability of debt. “Vendors are still sometimes thinking about the prices of yesterday, rather than tomorrow’s revenues and profitability,” he says. “There will clearly be more pressure on profits going forward, even though so far we haven’t seen any concrete evidence of problems in businesses.”


Marc Staal, managing partner at AAC Capital Partners (formerly ABN AMRO Capital) in the Netherlands, says that the combination of the credit crunch and general uncertainty about the global economy have led to a decline in transactions: “Overall, there’s a wait and see attitude in terms of the way the economy might go.”

But things are improving, he believes: “In the first period of the credit crunch many deals continued to be done, but then it hit harder in the first quarter of 2008 and transaction volumes suffered. Since then things seem to have improved somewhat, both in transaction volumes and valuations coming down a little.”

The positive thing for the Dutch private equity industry is that the wider economy is expected to weather global economic uncertainties better than most. In March the IMF said that the stable macro-economic policies and structural reforms carried out in the Netherlands in the early years of the decade stood the economy in good stead. It said it expected GDP growth in the Netherlands to outperform the EU average, with a forecast of 2.1% this year.

Earlier in the year the OECD also praised the Dutch economy for shrugging off the economic stagnation of the first half of the 2000s. It said the openness of the Dutch economy had helped and its business-friendly environment. Structural reforms of pensions systems, healthcare and disability benefits had also contributed to the recovery.

But, while deals are being done, the volume of transactions is down. A key part of that is the difficulty in getting debt. In the Netherlands this is due not just to the credit crunch but also the acquisition of ABN AMRO last October by RBS, Fortis and Santander. With both Fortis and RBS struggling with their balance sheet they have been more picky in terms of the kind of deal they will finance in the Netherlands and other markets.

Also, because of competition rules Fortis is having to dispose of certain ABN AMRO business units in the Benelux. What this means, says KPMG partner Wouter van der Heijden, is that in time there will be a significant new player in the Dutch banking market. But for the moment there is some uncertainty in the lending community about whether certain individuals will be working for Fortis or for the new banking business spun out of former ABN AMRO assets. “That uncertainty is impacting a little on how easily transactions can access debt,” says van der Heijden.

He adds that the €50m to €250m market is still fairly active in private equity and that trade buyers have returned to the market, now that financial buyers no longer have access to the cheap debt that put them at an advantage before the credit crunch.

Among recent deals in the Netherlands are CVC’s acquisition of Dutch supermarket group Schuitema. The UK-based firm acquired a 73% stake in the company, which has more than 400 stores. The transaction gives Schuitema an enterprise value of €950m. In other deals, US private equity house Aquiline Capital Partners bought a 5.1% stake in equities trader BinckBank, the former online brokerage subsidiary of Rabobank.

AAC Capital has carried out a couple of sizable exits and is also focusing on add-on acquisitions for portfolio companies. Last autumn the firm sold FABORY, a distributor of fastening products, to HgCapital for €345m. In January this year, in partnership with Gilde Buyout Partners, it sold coffee roasting company Drie Mollen to CapVest. AAC and Gilde supported a significant buy-and-build strategy at Drie Mollen, helping it to expand into new markets in other countries. “As well as these exits, we’ve done 10 to 12 adds-ons in the past year for portfolio companies,” says Staal.

He adds that if the market returns to more normal conditions the firm would be interested in buying: “So far, the companies that have come up have not been what we’re looking for or the valuation has not been right. I think there’s a lot of pent-up supply among would-be vendors who have postponed selling.”

Getting the house in order

3i’s Menno Antal agrees that now is a good time to focus on portfolio companies: “We’re looking a buying opportunities but it’s also a very important time for portfolio companies and it’s probably true to say that many of the companies that were bought by private equity in recent years were acquired at too high a price. That means it will be a challenge for PE houses to make their portfolio work and get good returns.” He adds that 3i may be looking more actively for new acquisitions in six months or so, by which time there is a good chance valuations may be more accurately reflecting the changed economic environment.

The crucial thing in today’s environment, says Antal, is that private equity houses recognise the importance of really adding value to their investments: “We continue to be focused on value creation, based on our sector knowledge and the functional expertise we bring to companies. For private equity to be successful in the current market it will have to bring something special to the businesses it has acquired.”

A further challenge for the Dutch private equity market is the political and regulatory environment. In some ways the Netherlands’ open economy and trading history has similarities to the Anglo-Saxon business model and this has enabled private equity to play a much larger role in the wider economy, in relative terms, than in some other European markets.

But at the same time there has been some suspicion among law makers and the media about the activities of hedge funds and private equity, particularly those from overseas, as well as a discomfort at the perceived excesses of the financial markets. This came to the fore last year, when concerns were raised about the attempt by hedge funds to break up major listed Dutch companies such as industrial conglomerate Stork. There had also been worries expressed by trade unions and others about how private equity firms were running some businesses and about high levels of leverage.

Part of the NVP’s response was to publish a new code of conduct for private equity houses, so as to increase transparency. Since last year the effects of the credit crunch have brought the heat down and political concerns have dampened, says Marc Staal: “Much of it was due to a misunderstanding of the role of private equity and activist shareholders. While there is still some concern about the latter, people are clearer about the differences with private equity.”

Nevertheless, the NVP is currently battling against proposals which would increase the effective tax rate on carried interest by fund managers and on investments held by portfolio company managers. Tjarda Molenaar of the NVP says that private equity has been dragged into a campaign to curb executive pay in listed companies. She also objects to the fact that the changes, due to come into force at the start of next year, will not be accompanied by transitional arrangements. The NVP is currently lobbying the Government to see if it can win modification of the proposals but, if there is no dilution of the changes, the environment for private equity in the Netherlands will be weakened, believes Molenaar.

Belgian slowdown

In Belgium there has been far less suspicion of private equity, largely because buyouts have been less high-profile and the market is less developed there. Andre Xavier Cooreman, chief operating officer at buyout house Sofinim, says the mid-market and lower mid-market are still active: “Deals up to €200m to €300m enterprise value are still happening but the market has not been hit too hard by the credit crunch because leverage levels were never as high here as in some other countries.”

The lending banks in Belgium are still willing to lend, often forming clubs of three or four banks so that they can keep the debt on their books. “Most of the Belgian banks have commercial relationships with portfolio companies of private equity houses and want to maintain those relationships.”

But deals are taking longer to do and valuations are still, arguably, too high, believes Cooreman. Sofinim has its eye on a couple of opportunities for acquisitions, he says, but is willing to take its time and not rush into anything. “We want to feel confident about the business plan and the valuation of any potential acquisition. Our main focus has been in supporting our portfolio companies with their buy-and-build strategies.”

Among the transactions in Belgium since the credit crunch are Lion Capital’s acquisition of AS Adventure Group last November. The retailer of outdoor equipment and clothing was bought for €263m including debt. Among possible upcoming transactions are the sale by 3i of ABX Logistics Group, which is reported to have asked UBS to prepare sales documents for possible buyers. The move is an attempt to tap increasing investor appetite for global freight companies and ABX Logistics is expected to be valued at around €600m.

Yann Dekeyser, a corporate finance partner at KPMG in Belgium, says that generally it is the €1bn-plus deal market that has been hit by the credit crunch and that there are few such large deals in Belgium. He says: “In that sense, Belgium has been less affected by the credit crunch, but there has been a change in mindset among private equity houses, including those at the lower end, who are less keen to make acquisitions.” PE houses are currently more focused on their portfolio, he says, and digesting the acquisitions that they made before last summer.

Despite the fall in acquisitions made by PE houses directly, there has been continued activity by private equity portfolio companies, says Dekuyser: “We’ve seen a number of add-ons made by portfolio companies owned by houses such as CVC, KVC and Fortis in Belgium.”

Sidebar – Public support

Public sector programmes are seeking to encourage venture capital investment in the Benelux area, but have not been able to prevent a shake-out of VC funds focusing on the region.

There are significant opportunities for VC investment in the Benelux, according to funds active in the region. But opinion is divided over the efficacy of public sector attempts to stimulate start-ups.

“We’re seeing quite high levels of activity in the Benelux, in healthcare and biotech, and that’s in large part a consequence of the Dutch Government’s support of seed funds,” says Pieter van der Meer, general partner at Gilde Healthcare Partners, which last year closed a €150m European healthcare fund.

It was the second fund from the Dutch-based firm, which takes a pan-European approach but has made several key investments in Benelux businesses such as Belgian biopharmaceutical company Ablynx and Holland’s Agendia, which is developing a diagnostic testing product that can reduce the use of chemotherapy in breast cancer treatment by a quarter. Agendia last month [May] won an award from the Dutch Government for being one of the top healthcare innovations.

“Agendia’s product is now approved by the FDA in the US and this award from the Dutch Government will help it catch up in Europe,” says Van der Meer.

The Dutch Government launched its TechnoPartner programme in 2005, providing seed capital to start-ups in technology, as well as advice and coaching to entrepreneurs. Capital brought into the start-ups was matched by government loans. In Belgium the Archimedes programme to encourage start-ups was an initiative of the Flemish region. There is also activity to stimulate start-ups in Belgium by the Flanders Institute of Biotechnology.

Van der Meer says that the Belgian programme is in some ways more institutionalised. “The Flanders Institute of Biotechnology, for example, adopts more of a bottom-up approach in which it promotes ideas, turns them into intellectual property and then brings in management.” In the Netherlands, by contrast, the process begins with the manager who collects assets and seeks finance. “Both models have their strengths and weaknesses,” says Van der Meer. “In the Netherlands more start-ups emerge but in Belgium they are of higher quality.”

Overall, however, the Dutch VC market is much better served by funds than the market in Belgium, where there are far fewer funds.” In healthcare and biotech alone, there are about 10 funds in the Netherlands, focusing on different development phases,” says Van der Meer.

Sophie Manigart, a professor at the Vlerick Leuven Management School at Ghent University in Belgium, says that public sector funds in Flanders have had some success in stimulating seed and early-stage investment in start-ups: “The difficulty comes when companies are seeking second tranche funding because there are very few larger funds and Belgium has a lack of institutional investment in venture capital.” Some companies have been able to get round this problem by tapping international investors for later stage financing, she says.

Alex Brabers, vice-president of ICT activity for Antwerp-based GIMV Venture Capital, says that in the last two years there has been a significant shake-out of VC funds focusing on the Benelux: “The number of significant players has fallen, as the venture teams at some of the established players withdrew from the market, such as Gilde, ABN AMRO and IT Partners.”

Brabers is more sceptical about the role of government funding for venture capital in Belgium and the Netherlands. He says that, overall, these programmes are small and can’t carry companies through to maturity. “There’s a tendency to drip-feed and I don’t believe in drip-feeding new businesses because you end up with bonsais rather then sequoias.”

He argues that start-up entrepreneurs need to build a company based on their vision, not on the financial limitations of the market. In Belgium there are many funds that can invest a maximum of €1.5m, he says, and while for some this might be enough for most of them it won’t be. Companies that need more should be willing to try and raise that money, even internationally if needed, rather than curbing their ambitions to fit in with the money available domestically.

In general, the VC funds that have survived the shake-up have some good investment opportunities, says Brabers. “The VCs that have survived have become more international in their outlook. Our Benelux investments, for example, now only make up a part of our overall investments because we’re looking across Europe and that’s true of other funds.”

VC funds in the region are also focusing more on later stage investments, he says, which is a trend that is common across Europe: “Even early stage VC funds are now considering later stage investment.”

Among GIMV’s most successful investments was Option, a Belgian wireless technology business. GIMV first invested in the business in the early 1990s when the company had revenues of around €1m. It is now quoted on the Euronext exchange and at one point had a market capitalisation of about €1bn.

One of the newcomers to the market in the Benelux is Amsterdam-based Rabo Ventures, part of Rabo Private Equity. Rabo Ventures focuses on fast-growing companies in the cleantech sector, across Europe and the US. In May 2008 it formed a joint venture with Delta Lloyd to become a core shareholder in Dutch sustainable energy company Econcern.

Koen van Engelen, director of Rabo Ventures, says: “We see substantial deal flow in European cleantech, where we think the competition for assets is less fierce than in the US and so it’s easier to get into deals at the later stage financing.”