We are born, we die, and in between we human beings try to make the most of the life we’re given and prosper. For buy-and-build specialist Waterland Private Equity Investments, the story of its own success starts in offering services that surround life’s natural end.

Waterland saw the opportunity for its first deal in a region where people prefer to be cremated rather than buried. When assessing the Belgian and Dutch funeral services activities of US-based Stewart Enterprises, businessman Rob Thielen, founder and chairman of Waterland, saw the ageing population as a key investment thesis. His firm bought the business for an undisclosed sum in 2001. Waterland was founded in 1999 by Thielen, who, at that time, had experience in cross-border M&A and none in private equity or investment banking. The firm’s underlying investment thesis: find lifestyle inflection points and accelerate company growth through buy and build.

The firm has come a long way since its debut fund in 2000, which gathered €49.5 million, according to Private Equity International data. The firm, with its headquarters in Bussum – a small town southeast of Amsterdam, referred to by one LP of the firm as London’s Windsor to the Netherlands’ capital – is a consistently top-performing buyout fund, according to the annual HEC-DowJones Private Equity Performance Ranking. Known for its winning buy-and-build formula, it has raised in excess of €10 billion and made investments in more than 900 companies – approximately 150 platform deals and over 750 add-ons – over the last two decades. The firm has won Benelux Firm of the Year in PEI’s annual awards five times since 2015.

Hot ticket

Among its investor base are a number of US blue-chip LP names. Its latest fund – the 2020-vintage, €2.5 billion Fund VIII, which closed on its hard-cap after only three months in market, attracted investments from the likes of State of Wisconsin Investment Board, Florida Retirement System Trust Fund, Texas County and District Retirement System, and Massachusetts Pension Reserves Investment Management, PEI data shows. These four LPs are returning investors in Waterland’s funds. That list of repeat backers also includes ATP Private Equity Partners and the UK’s Local Pensions Partnership.

Oliver Gottschalg of MJ Hudson
Oliver Gottschalg, MJ Hudson

“[Waterland has been able to keep up top performance] where, arguably, many other GPs are growing themselves to death”

Not deterred by the fundraising market’s choppy conditions, Waterland is back in the market seeking €3.5 billion for Fund IX. It’s also raising a debut Partnership Fund that will take minority stakes in businesses it has already owned.

Little is known about the firm’s inner workings and its employees. Attempts made by PEI to interview Waterland have been unsuccessful: a spokesman for the firm noted its “modest culture” of not “speaking about themselves too much”, passing along the message that the firm would decline to be interviewed for this story.

Waterland did not comment on any of the points put to it relating to this report.

Speaking of Thielen, Mounir Guen, founder of placement firm MVision, says he has “never met an individual [like Thielen] who has a striking vision and was so different in his style and approach”.

“The thesis of his model to this day does not seem replicated,” says Guen. “This is an individual who craved and desired and had a very strong entrepreneurial disposition. He understood how to make money.”

Guen should know: he was the agent who spotted Thielen’s X factor more than two decades ago when they met via a mutual contact. Guen also masterminded the firm’s closed-door fundraising process, according to sources.

In spite of these strong building blocks, there are some LPs who hold a critical view of Waterland. Its closed-shop tactics have led to some investors choosing not to run due diligence on certain fundraises, while some existing LPs have cut ties with Waterland after disagreements. And those tactics work both ways – the firm has been known to turn away LPs based on what their asks were in order to back the fund. A source close to the firm, meanwhile, notes that these closed-shop tactics are indicative of huge LP demand for Waterland’s funds.

An investment professional in one of Waterland’s former fund of funds investors, who knows the firm well, describes the firm’s current group managing partner, Frank Vlayen, as “a very strong investment professional” who is also more “down to earth” than his predecessor. Under Vlayen, the key question has been whether past gripes can now be classified as water under the bridge. However, with Vlayen planning to step down in May next year, things at Waterland could be set for an about-turn once more.

Waterland is well known for its buy-and-build strategy: wrapping up companies in fractured sectors with attractive tailwinds and reaping the rewards.

Buy and builds are as old as private equity itself, and offer a clear path to value for PE firms. Buying a strong platform company and building value rapidly through well-executed add-ons can generate impressive returns. The strategy has since risen in popularity: in 2003, about one-fifth of all buy and builds saw at least four sequential acquisitions of smaller companies by a single platform company. That number has grown to 30 percent in recent years, and in 10 percent of the cases, there were least 10 smaller companies rolled up into the platform deal, according to a 2019 report from Bain & Co.

In Waterland’s case, it would, on average, make six sequential add-on acquisitions per platform company. Sources with knowledge of the firm’s investment thesis note that these acquisitions aren’t big buyouts that have huge amounts of leverage on them.

Sources also say the firm does not have a big operating partner bench, and has mainly pushed integration down to the portfolio companies. “The businesses tend to be relatively small, single-market, single-country [companies with] few products and not that many customers,” says a former investor and limited partner advisory committee member of Waterland’s funds. “If you’re running at that pace of between 30 to 50 deals per fund, you don’t have time to do that, right? You’ve got to get somebody else to do it or let the portfolio company do it themselves.”

A source with knowledge of Waterland’s buy-and-build operations says the firm’s investment teams work directly with its portfolio companies from origination and throughout the life of each investment until exit. Many senior investment professionals also have strong operational backgrounds.

The source adds that the investment teams are supported by a sizeable and growing team of portfolio operations managers who are focused on integration, organisational development and operational process improvement.

Winning formula

Alongside its buy-and-build DNA, the firm has also stayed heavily committed to the size of the tickets it invests. Such a commitment over the past decade speaks to the consistency of its returns, says Oliver Gottschalg, founder and head of research of MJ Hudson’s fund performance analytics division, on the back of analysis run by him and his team.

“Even as Waterland grew… they’ve been dramatically disciplined in their bite size while being very opportunistic on a pan-European basis,” Gottschalg says.

By leveraging its different locations across the continent and keeping discipline on the tickets it spends, the firm has been able to keep up top performance “where, arguably, many other GPs are growing themselves to death, performance-wise”.

Not all deals have been successes. Waterland’s 2015 sale of portfolio company Omega Pharma Invest to Perrigo Company in a cash-and-equity transaction valued at approximately €3.8 billion got messy, resulting in a court case. Perrigo started arbitration proceedings in 2016 against the sellers, claiming they had falsified the company’s figures to make it appear more attractive. The seller group, which included Waterland, was fined €266 million.

Today, as PE enters a market downturn after more than a decade of low interest rates and cheap debt, insiders PEI spoke to expect that Waterland is still set to benefit, with market participants remaining bullish on its approach. The buy-and-build strategy does not rely on traditional tailwinds like falling interest rates and stable GDP growth, and companies can buy up struggling competitors at a discount.

A London-based fund of funds manager who is familiar with Waterland tells PEI: “If you have the cash, you go and buy some interesting companies. Inevitably, when the cycle picks up, the whole market picks up and – in addition to the valuation you gained through top-line margin – you get the multiple uplift.”

As with its fund size, Waterland has also enlarged and adapted its footprint over time. The once strictly Benelux-focused firm opened a Paris office in 2020 and outposts in Ireland and Switzerland in 2019 and 2018, respectively.

In a rare interview in June last year, Waterland spoke with PEI about the opening of its London office, as well as the appointment of former Dunedin partner Oli Bevan as head of UK. London is Waterland’s second UK office, after Manchester.

Bevan told PEI that the firm expected to more than triple its UK team to 25 by 2023. When asked whether the firm would seek new fund adjacencies, Bevan said it was “sticking to its knitting” and that it will continue to do what it has proven it’s good at.

Five months after its London launch, Waterland opened an office in Madrid – its 12th globally. Gottschalg notes that, in spite of its growing footprint, Waterland is “thoughtful about leveraging boots on the ground but not [falling] for the mistake of [saying], ‘Hey, we have an office in Prague, we’ll do a Czech deal.’”

He recalls a conversation he had around five years ago with one of Waterland’s partners, who seemed unperturbed about not yet having done a deal two years after setting up a local office. Gottschalg likens the firm to “a surfer. You are sitting there in the ocean, on the surfboard. You may be hanging out there for a long time… until you catch a wave that’s good enough to actually… carry you to good returns.”

Premium rewards

Unlike many of its peers, Waterland can command a rare feature in its fund economics: premium carry.

Waterland is targeting €3.5 billion for its latest private equity fund. The buy-and-build specialist is also seeking to raise a fund that will take minority stakes in businesses sold by its own flagship funds, joining peers TA Associates, Insight Partners and Equistone Partners Europe, who have raised similar vehicles. PEI understands the vehicle is seeking to raise €500 million.

Waterland Private Equity Fund IX, like its predecessors, commands premium fund economics with carried interest at 25 percent, sources say. Its hurdle also sits above the industry norm at 9 percent, meaning the fund has a higher return threshold to meet before the GP starts earning carry. A target 3x gross return was communicated to LPs.

The closed-off shop has cast its net wider this time around, with LPs that had not previously been invited to consider the illustrious group now receiving documents for the fund. This includes high-net-worth investors, according to a source with knowledge of the fundraise.

Evercore is advising on the fundraise for the first time, taking the baton from MVision. Waterland’s head of investor relations, Marc Lutgen, joined in 2020 from the latter, where he spent 12 years and worked across three of Waterland’s funds up to Fund VII.

The firm has also completed two continuation fund transactions over the past couple of years, both of which saw ICG as the sole buyer with Evercore advising, sources say. Waterland moved United Petfood out of its 2015-vintage, €1.28 billion Fund VI – a stellar performer – into a single-asset continuation fund last year. It tapped the secondaries market again this year to move Netherlands-based childcare provider Partou into a “Dutch socially responsible” continuation fund. The United Petfood continuation fund is understood to have a premium carry tier, according to sources. It’s unclear whether Partou also did. One source points out that it is because Waterland are “rockstars” that they were able to achieve such terms.

As Waterland has so many companies within its fund, largely due to its buy-and-build approach, secondaries sources tells PEI they expect Waterland will do many more of these transactions.

Widening horizons

One wonders whether Thielen could have predicted the firm’s geographical sprawl when he spoke to PEI in 2006. The firm had launched its German office the year prior, which at the time of interview had a team of six professionals. In the more than two decades since it was founded, the Dutch firm has grown to more than 130 staff across 12 offices.

At least three sources PEI spoke to highlight the firm’s local-for-local approach.

MVision’s Guen says Waterland’s local-for-local strategy works for its investment thesis of looking at lifestyle inflection points and backing businesses that could be run more efficiently to address those points. “That approach has not changed to this day, even as they’ve expanded into several countries and gone into succession. It’s a unique and remarkable machine. It’s super-efficient. The DNA of its individuals… They know exactly what the firm is meant to be.”

With its performance and its messaging to market, Waterland has created impressive pulling power for some investors who see it as a prestigious firm operating in near secrecy. Indeed, the buy-and-build specialist holds so much sway that many investors say they feel fortunate to commit capital to the fund.

PEI spoke to 16 LPs, GPs and investment consultants for this report. Their descriptions of Waterland include “super amazing”, “like a machine”, “not an asset manager but a classic buyout shop” and “absolutely killing it”.

Its success has also led to peers feeling grateful to work alongside them in the market. One head of investor relations at a pan-European manager tells PEI: “It’s really good to see a firm being successful on a repeat basis through a nuts-and-bolts approach to PE that’s very rooted in fundamentals rather than riding the market.”

But for all this praise, there are others who feel quite differently about Waterland’s extreme use of the moniker ‘private’ equity. The former investor and LPAC member says LPs can be “quite Marmite-y” about Waterland, referring to the British food that people are said to either love or hate.

“They have an incredible following driven by performance,” this investor says. “There’s also a group that don’t want anything to do with [Waterland], partly because they can’t get into it. And of the people that don’t want to have to do anything with it, some of them just don’t like the model.”

PEI has heard of several instances of Waterland’s heavy-handedness to outside requirements and questions raised by potential and existing investors, citing apparent inaccessibility or transparency issues. In some instances, such conversations turned into rows.

One European investment manager that backed Waterland’s earlier funds says that, as an LP, you are “just a number”, adding that the firm “set[s] the rules and if you don’t like it, leave”. The LP adds that they stepped out when the firm “increased their performance fees, while maintaining their fixed fee percentage at a heavily increased fund size”. It is unclear how much Waterland charged, and the LP declined to provide further details.

Of the questions raised by potential investors, one investment manager with a US pension fund – with more than $30 billion of assets in private equity – notes that Waterland did not want to agree to the LP’s terms, which included an agreement not to sue the investor should something go wrong, among other requirements. It is unclear whether it was all the terms of that agreement they rejected, or just some of the terms in the limited partner agreement. That said, the LP notes it was unusual for a GP to turn down an investor with a flat no.

Another potential investor based in the Benelux region who was keen to commit to Waterland’s eighth fund says that, when they finally heard back from Waterland’s placement agent after a few months of back and forth, all they got was a single-page term sheet and a question of: ‘Are you going to invest or not?’ They didn’t. There was also no access given to the data room, the investor adds.

This apparent arrogance, as three LPs note, is evident because “they’re good and they know it”.

“It’s very much typically a case of, ‘This is what we’re selling you. This is the performance, this is what we’re doing,’” says the investor and LPAC member. Fundraisings are nearly always an evolved version of the prior fund. There might be a geographical angle expansion to it – the last time around, it was the UK and Ireland – but the fundamental model is the same, the investor adds.

“There’s no negotiation because a lot of people are queueing up. [Waterland knows] they have a great product, and they’re not giving it away. And then they go raising the money and the whole thing rolls over one more time.”

What that means in real terms is that LPs generally are not allowed time with the GP, says a placement agent with knowledge of Waterland’s fundraising process under MVision. “There were three days given, you pick your day, and it was crazy… LPs all sit down in the room, they all got joint access… Time’s up and you’re done. And those were existing investors. Everyone knew it was absolutely vicious, but they all had to do it because they all desperately wanted access.”

Guen’s thoughts on the subject are more equitable: “There was always huge respect for the investor in the model of execution, but the overhang of desire to have access… was extremely high. As a result of that, it was natural to follow a fixed time process. But it’s done with a lot of respect, and it’s done with understanding.”

The fundraising process, which was historically run by chief financial officer Bart Elema, involves a stringent filtering system that identifies the LP’s skill sets, regional networks and access points, it is understood. “For example, if they go into France, they want access to certain profiles and networks within the industrial entrepreneurial business community, as well as a couple of pristine, long-term capital investors,” Guen says. “The investors have been pre-identified and understood relative to the filtering system and regulations. In the past, if you were not on the list, it just didn’t work.”

It is unclear whether Evercore, which is advising on the firm’s latest Fund IX capital raise, follows the same process. A fellow GP was told the placement agent had been given hand-picked and curated names that might be deemed worthy of becoming a Waterland LP. Evercore declined to comment on fundraising.

It is no secret that the fees charged to investors in Waterland’s funds are high. Many investors view those fees as the cost of entry into a stellar performer. Guen could not be drawn on the specific fund terms, but notes Waterland’s vehicles have had “premium economics”.

What’s driving Waterland’s returns?

Oliver Gottschalg, founder and head of research at MJ Hudson’s fund performance analytics division, compares Waterland funds to those of its peers.

Ask any Europe-based private equity professional about the top-performing GPs in the region and Waterland is among the first mentioned. The Dutch manager topped the HEC-DowJones Private Equity Performance Ranking – which analyses performance data from 517 PE firms and the 991 funds they raised between 2008 and 2017 – for the first time in 2017 and is the only firm to have been placed in the top 15 globally for the last 12 years. In 2020, one news outlet referred to Waterland as “the best PE firm you’ve never heard of”.

“They are not sector specialists,” says Oliver Gottschalg, founder and head of research at MJ Hudson’s fund performance analytics division. “They are the exception to the rule.”

In further peer analysis for PEI, Gottschalg ran an algorithm based on the industry, geography, investment period and size category of Waterland’s deals against a competitive set of 10 firms with similar deals. The aggregate comp set for Waterland VIII, for example, incudes Altor Fund V, Gilde Buyout Fund VI and Ardian Expansion Fund V.

In the relatively difficult years between 2006 and 2011, Waterland III, IV and V outperformed the relative peer benchmark, delivering an IRR of 22.7 percent, 16.6 percent and 41 percent, respectively. That compares with 9.6 percent, 10.3 percent, and 12.2 percent for other funds – including EQT Mid-Market Fund I, FSN Capital II and Montagu IV – in the peer group. Gottschalg says this is a textbook example of a GP that is best in class.

No one is as consistent as Waterland, according to Gottschalg’s analysis. Case in point: Fund VI and VII generated returns of 28 percent and 33 percent as of August 2022, while their comp set delivered about 22 percent.

“Even in a more attractive environment overall, they still add about 10 percent outperformance. I’ve rarely seen a profile like this, and I see hundreds and hundreds of data on GPs,” Gottschalg says.

What’s next?

As the tight-lipped shop declined to muse on what it has planned for the future, there are some assumptions that can be made based on what investors have liked in the past. That is: its buy-and-build strategy, its consistent ticket deployment, its local savvy and, above all else, its hugely successful return track record. With the latest flagship targeting €1 billion more than it raised for its predecessor, precedent suggests the fund will do more deals compared with previous vintages.

It is worth noting that Waterland reserves a considerable amount of capital for follow-on funds, and some market participants say there is a lot of capital that needs to be deployed in its 2020 fund.

The key question from LPs is whether Waterland is staffed for it – and, furthermore, whether it has that bench of experience and team expertise to invest judiciously and in a way that continues to deliver returns. With a larger fund size, investors will want to see more talent being brought on by Waterland. As the head of European private equity at an investment consultant remarks, one thing that annoys investors is when managers raise bigger and bigger funds and say they will sort the talent out next year. Such an approach can dilute returns, as the investment team is required to cast their attention towards an increasingly large portfolio – something Waterland’s private equity peers have fallen foul of in the past.

On the topic of Waterland’s growing geographical remit, Guen suggests the firm has quite a bit of headroom to grow further: “While their model is differentiated, the big question is: how much of Europe will they seek? And where else can they go? Should they go first to ‘Anglo-Saxon’ economies like Australia or the US? Or should they seek structures that align themselves to the future and the potential of the opportunities that they’ve created?”

Waterland, alongside its peers, faces a tough fundraising market, with some $118 billion of capital sought by Europe-focused funds alone, according to PEI’s H1 2022 fundraising report. The chances of seeing a rapid fundraising process like the one Waterland carried out in 2020 appear dampened. Even so, a source with knowledge of fundraising for Fund IX says Waterland expects the vehicle to be one of the largest funds raised in 2022, completed in a short time frame and with a high re-up rate.

As one placement agent who used to work with Waterland in prior funds says: “Everyone wants to get into Waterland, but if you haven’t got capital, you haven’t got capital. Waterland [has] assumed that there’s going to be excess capital or excess demand for their fund, but they’ve not given investors enough runway.”

The sky could be the limit for Waterland if it is able to replicate its small-shop, high-return strategy with larger flagship funds. Waterland’s reputation precedes it and, in a variety of ways, has aided it in reaching its current heights.

The downside is that, from those great heights, there is quite a way to fall should Waterland’s own due diligence on larger fund sizes fall short of expectations.

“If you don’t perform, you get the benefit of the doubt – at least for one fund,” the placement agent says. “But the way they behave, if they put a foot wrong… it’s going to have dire consequences.”