Benelux: A little less Low

As the Benelux economies remain flat-lined, deal flow is slowing down. But whilst political uncertainty is adding to the market volatility, fundraising is surprisingly up and nearly hitting pre-crisis levels, writes Yolanda Bobeldijk

This summer, the Netherlands had high hopes that the performance of the national football team at the European Championships would provide the country – and its flat-lining economy – with a much-needed boost. These hopes were short-lived, however, as the Dutch unexpectedly crashed out of the tournament during the group stages. With Belgium and Luxembourg not even managing to qualify, it turned out to be a dispiriting summer for the region’s football fans.

Unfortunately, its private equity market doesn’t have much to cheer about at the moment either. Deal flow in Benelux remains broadly flat, according to data provider Mergermarket. In 2011, in fact, although the number of deals with a value of over $5 billion was up year-on year – 506, up from 427 in 2010 – total deal value fell, from €51.5 billion to €45 billion. In 2012, things seem to have got worse: there were 214 deals completed the first half, 51 fewer than in the first half of 2011.

Bas Glas, partner at mid-market firm Gilde Equity Management, agrees that there are fewer good deals available. “Attractive companies are scarce.” This scarcity drives up competition, he believes. “There is enough cash, both at strategic parties and in private equity as well. Some larger companies have [put] their house in order in response to the downturn and are now focused on acquisitions backed by healthy balance sheets,” he adds.

This sentiment is echoed by Koos Teule, chief financial officer at Gilde Buy Out Partners (a sister company of GEM, which focuses on larger deals). “Whenever there is a good deal, everybody jumps on it, not just private equity firms. Prices are therefore really high.” Gilde was recently outbid on two occasions, he says. “We were not prepared to pay a price that is too high. We have to keep our discipline otherwise things will go wrong in the long term.”

Strategic buyers have recently outbid private equity firms, agrees Peter-Jan Hooy, managing director and head of structured acquisition finance at ING. “The strategic companies have a lot of advantages. They are operating in the same market [as the competitor they try to buy], they can achieve cost-effiencies.” And as well as the takeover company, they can provide their own business as a security to the lender. “Therefore banks are sometimes prepared to lend a bit more – in absolute terms,” says Hooy.

Additionally, in 2011, deal flow was under pressure because a number of auctions were pulled, he says, with many companies pulling the plug on a potential sale process. “These withdrawals increased significantly in the mid-market because there wasn’t enough appetite for a certain price. Enterprise expectations were too high.”
But the biggest impact on deal flow has been a decrease in primary supply, according to Hooy. “It’s difficult to say why this happens. But it’s the main source for private equity firms. If you don’t have primaries right now, you won’t have secondaries in the next few years, because it’s a cycle.” 


Nonetheless, there are still good deals to be found in sectors that enjoy continued growth, points out Marc Staal, managing partner at AAC Capital. His firm recently bought Desotec, a Belgium environmental services company. “It has a good concept and has strong organic growth. Due to increasing laws and compliance to meet [environmental] regulations there is an increased demand for these types of services,” he says.
Healthcare is another sector that has caught the eye of investors. The sector is increasingly popular with private equity firms in The Netherlands, according to a recent study from Dutch consultancy firm Boer & Croon. There are more and more specialist funds that specifically focus on healthcare deals, including NPM Healthcare and Gilde Healthcare Partners.

Waterland Private Equity Investments is another firm that has tapped into the healthcare sector: in recent years it bought and sold dental company Excent, while also investing in care homes, medical laboratories and orthopaedic services. The sector is attractive because of the ageing population, says Frank Vlayen, managing principle at Waterland.

As government budgets come under greater pressure, the private sector is playing a greater role in health provision – which ought to represent an opportunity. “The returns [in healthcare] are not necessarily high, but they are stable and predictable,” explains Felix Zwart, an analyst at NVP, the Dutch industry trade association. “We believe private equity can actually help with the financing of the health system and keep it available to everybody.”
In addition, turnaround investments are still widely available, according to the NVP. Gert Jan van der Hoeven, founder and managing parter at distressed investor H2 Equity Partners, agrees. “For us right now there is a lot to do. During good economic times, for instance in 2006 and 2007, we don’t benefit as much, except that we can exit well.”

But it’s not all plain sailing. “We have a good deal flow of businesses that need a cash injection, deleveraging or a turnaround,” he adds. “However, a lot of companies are doing badly and we have to be really careful. There is hardly growth and no growth perspective. Therefore there is less room to make returns on investments.”
The political situation in The Netherlands is clearly not helping matters. The country’s last six coalition cabinets all collapsed before completing their official four year term had been completed. The Dutch went to the polls again on 12 September; a very lengthy coalition formation period is likely to follow, which means the new government will probably not be formally installed for months to come.

Since the election came down to a choice between the socialist party and the labour party on the one hand and the liberals on the other, Dutch GPs are increasingly concerned about the prospect of having a left-wing government. “Firms don’t tap into certain sectors due to political uncertainty,” says Zwart.

Healthcare is a good example of that, he adds. “Market competition and privatisation have increased in recent years, but members are very concerned that if Emile Roemer’s Socialist Party gets into power, these developments will be changed overnight. This means we will immediately go back to the health budgets from the 1970s. You’ll lose your entire investment and businesses will not be allowed to do anything in the health sector.”

Political uncertainty is not just an issue at home, of course. The ongoing issues in the euro zone are not helpful either, especially when firms operate internationally. “You don’t want to think about having separate currencies again, all of a sudden,” says Zwart. However, this is not something his members worry about on a day to day basis, he insists. “The work goes on. Many of our members just try and make the best of it.” 
All told, it’s perhaps no surprise that both Mergermarket and NVP predict a further drop in deal flow during the second half of 2012.


However, the fundraising picture is starting to look much more optimistic.
In the immediate wake of the credit crunch, it became very tough to raise money in the Benelux market. Both Gimv and Gilde Buy Out Partners started fundraising in 2009, when the recession was in full swing. “It was a disaster; everybody was in shock about the crisis,” Teule recalls. “Pension funds were holding off. They said ‘we will wait and see what happens first – we want to count our losses and see what the consequences are for the future’”.

Nonetheless, Gilde managed to reach its €800 million cap for Fund IV in June 2010. That same year, Gilde Equity Management raised €200 million inside three months, with between 80 and 90 percent of investors re-upping.
Other firms enjoyed similar success last year. H2 Equity Partners’s Fund IV hit its €300 million fundraising target, while Waterland Private Equity Investments raised €1.1 billion in five months, exceeding its €900 million target. Again, the large majority of Waterland’s investors re-upped.

In fact, across the board Benelux fundraising was almost up to pre-crisis levels in 2011, according to PEI’s data division – the total raised was €2.16 billion, only just below the €2.22 raised in 2008. For buyouts it was even closer: €1.96 in 2011, compared to €2.00 in 2008.
The figures are surprisingly good, acknowledges Zwart. “It clearly shows firms with a good track record still have opportunities to raise funds.”

The recipe for fundraising success is to stick with what you know, explains Glas of GEM. The firm has been consistent in its investment strategy for the last 15 years by focusing on the smaller mid-market. “Between 2006 and 2008, we did not buy companies at historically high multiples nor used excessive leverage. Our portfolio performed well during the crisis and I think it gives LPs confidence that in both good and bad economic times we are able to generate good returns.”

The question is: will there be enough deals to soak up all this dry powder? GPs believe deal flow will remain an issue for a while yet – but most seem to be adopting a ‘keep calm and carry on’ attitude. “We still have five years to invest our fund,” says Teule of Gilde Buy Out Partners. “Even if we wouldn’t do anything for an entire year, it will be 35 percent deployed after two years, so then we would only be 5 percent behind. We are not worried about it.”
Waterland’s Vlayen also remains optimistic. “We expect the effects of the current euro crisis to continue into next year, but we don’t have many problems in the portfolio companies. These are volatile times but also in volatile times it is possible to do good investments. It’s obviously not easy, you have to do your homework and be cautious.
The goal is to find the sectors that are still growing. They are still available.”

Glas of Gilde Equity Management is also positive. “You have to accept the volatility in the current markets, but the Benelux still has a good investment climate,” he says. “You have to be able to look through the cycle and also dare to invest.” Now more than ever, the most important thing is to have a long term vision, Glas believes. “But then that has always been the case with private equity,” he adds. “Private equity investing is after all no short term game.”
All told, patience is perhaps the key ingredient for Benelux private equity firms – just as it is for those long-suffering Dutch football fans.