Spot the difference

Benelux deal volume and value&#42

Country 1998 1999 2000 2001 2002&#42&#42
Netherlands 28 23 32 20 17
(€2,5212m) (€2,316m) (€1,952m) (€5,688m) (€1,206m)
Belgium 4 10 8 9 2
(€286m) (€821m) (€751m) (€1465m) (€235m)
Luxembourg 0 1 1 1 3
(€800m) (€397m) (€558m) (€1,877m)
European 594 551 473 387 312
total (€35,986m) (€50,743m) (€66,920m) (€68,090m) (€53,458m)

All quiet on the VC front
At the venture capital end of the spectrum, the difference between the Benelux countries is negligible, although clearly this is in part the result of the collective gloom felt by practitioners across Europe. ?Venture capital in Belgium was booming prebubble,? explains le Hodey. ?Around 60 per cent of capital raised went to venture capital firms.? In 2002, total VC investment in Benelux companies was €255.4m, according to Amsterdam-based research firm Windmill Reports, representing less than five per cent of the European total (€5.85bn). Nor has the decline shown any signs of levelling off in 2003. In the first quarter of 2002, Windmill recorded 24 deals totalling €185.1m of investment in Benelux, compared with ten deals in the region in Q1 2003 worth just €27.1m.

Despite this seemingly shrinking market, some VC firms remain positive. ?There are plenty of interesting investment opportunities in the region at the moment. Dealflow is down by about 25 per cent but the quality is significantly better.? So says Jos Peeters, managing partner at Leuven, Belgium-based firm Capricorn Venture Partners. Last December, the firm held a €20m first close of Capricorn Venture Fund II, which will focus on early-stage technology-based growth companies in Belgium and surrounding countries. The fund had originally targeted a final close at between €70m and €125m, but the final figure is now expected to be at the lower end of this scale, despite Capricorn being the only Belgian firm in fundraising mode.

?Across the Benelux region – both in terms of fundraising and investment – the market is very quiet,? says one GP at a Netherlands-based venture capital firm. ?Investors are sitting on their money.? Part of the reluctance to invest may stem from a number of the region's major venture capital funds having to write down their VC portfolios over the past twelve months. For example, The Investment Fund for Flanders (GIMV), which invests primarily in information and communication technology (ICT) and life sciences, announced in February a €290m write-down on its portfolio for 2002. The firm reported that the valuation of its portfolio had been reduced to €820m, compared with €1.18bn at the end of 2001. These are tough times, and the Benelux VC community knows this all too well. ?The number of VC firms in the Benelux deploying capital, particularly to earlystage businesses, is extremely limited,? says Alex Brabers, vice president at GIMV's ICT division.

As with so many venture firms, Benelux VCs are working hard to retain sufficient dry powder for existing portfolio companies as their funding requirements continue to be extended. Last year, for instance, GIMV invested a total of €159m, of which almost 70 per cent went into existing portfolio companies. Many VCs have also set themselves a target of trying to maximise the number of exits in 2003, rather than focusing on new investments. Whilst this may be important in the short term, some practitioners comment that the consequent diminution of new investment impacts not only on the development of the region's early-stage companies, but also on fellow VC firms who think the current climate as an ideal time to invest. ?Among the biggest challenges is finding good, reliable co-investment partners,? complains Jos Peeters. ?The limited number of active players makes it very difficult to syndicate deals.?

So there are problems in the Benelux venture capital sector: but are these problems really any different from the experience elsewhere? ?The European venture capital market is a disaster at the moment,? says NIB's Borgdorff. ?In the US, although dealflow is slow, the market is better-positioned to recover because it continues to have strong research centres, very experienced GPs and a dedicated group of investors who can look beyond the downturn. These factors are not there in Europe in the same volume.?

Who are the LPs?
Marking the difference between the region's limited partners proves to be more straightforward. ?It is difficult to talk about investors in the Benelux as a whole,? explains le Hodey of Campbell Lutyens. ?LPs in Belgium are very different from those in the Netherlands, where the pension funds play a big role.? Indeed, one need look no further than NIB Capital to highlight this (see the profile of NIB accompanying this article). This leviathan, with €14bn under management, is controlled by Dutch pension funds ABP and PGGM, two of the largest pension funds in the world.

?Much of Belgium's venture capital investment is driven by the government, primarily on a local level,? explains le Hodey. GIMV, one of the country's largest VC groups, was itself set up with government assistance in 1980, later floating on the Euronext stock exchange in 1987. ?Belgium's largest pension fund, Belgacom has started to look at private equity funds investing (they have their own direct venture fund), although on the whole, allocations are no more than one to two per cent at present,? reports le Hodey.

An absence of capital gains tax though makes Belgium an attractive opportunity for investors, both local and overseas, and a growing number of family offices have been keen to take advantage. ?A lot of capital in the Belgian market is originating from family offices in France and the Netherlands,? explains le Hodey.

One of the largest Belgian LPs is Compagnie Nationale à Portefeuille (CNP), the investment company of Belgian investor Albert Frere, which was recently involved in a takeover attempt of the struggling Viventures fund, in which CNP was a significant investor. In addition to its fund investments, the firm invests in a diverse group of sectors including the food industry, the wine-producing sector, power, publishing, selective retail and luxury products.

As with Belgium, Luxembourg is dominated by HNW investors, although the market is significantly underdeveloped when compared with its larger neighbour. ?Investors in Luxembourg are generally more conservative and cautious. They're not yet so keen on hedge funds or private equity,? says Le Hodey. Despite this, a mix of local and international funds are listed on the Luxembourg stock market. One such fund is BGL Investment

Partners, an initiative launched in 2000 by Banque Générale de Luxembourg which manages €257m, divided between public (60 per cent) and private investments (40 per cent). ?Fortis Bank controls a 40 per cent interest in the business, with family offices holding a 15 per cent stake,? explains Jér^me Wittamer, senior investment manager at the firm. ?The remainder is held by the public via the firm's market listing.?

The other major Luxembourg-based investor is the European Investment Fund, backed by the European Investment Bank and a number of Europe's largest banks. The fund backs European venture capital funds that support SMEs, particularly those that are in their early stages of development and those that are technology-oriented. It currently has a portfolio in excess of €2.45bn invested in 184 venture capital funds.

Perhaps the most significant recent development among Dutch LPs was the prominent role played by the Brenninkmeijer family, the Dutch family that controls the Swiss-based investment vehicle Bregal, in the debut fund launched by Dominic Shorthouse at Englefield Capital. Bregal committed €495m to Englefield's €660m fund, taking a bold and unexpected step into the limelight. Bregal was also one of the key investors backing MidOcean Partners, the €1.5bn spinout in February this year from Deutsche Bank. ?It's difficult to understand why they [the Brenninkmeijer family] were so willing to be seen all over the papers,? says one private equity practitioner in the region. ?Nonetheless, we're likely to see an increasing number of the big families, and the shipping families, getting involved in the asset class in the near future.?

Close-knit community
The overall impression is that private equity's continuing evolution in the region reflects some of the common themes that are shaping private equity globally. This is a mature and diverse enough community for a range of traits to be evident. Arguably the Netherlands, with its sophisticated Anglo-Saxon modelled buyout market, is leading the way. Belgium and Luxembourg, whose shared currency pre-dates the arrival of the Euro, share many characteristics, mainly the result of similar investment philosophies that focus as much on government-backed initiatives and HNW involvement. At the VC end of the spectrum, the prevailing mood is one of caution: enough VCs have had their fingers burnt to be wary of committing much new capital to anything other than refinancings. But now, as others elsewhere will remind you, is a great time to buy. Expect Benelux practitioners to continue to reshape their market with these factors in mind.

NIB: ?We like where we are?
Already one of Europe's largest private equity players, NIB Capital Private Equity is now seeking to extend its role globally. Ricky Morton talks to managing partner Wim Borgdorff about the group's current activities, its ambition to put itself amongst the largest integrated private equity firms worldwide and its direct investment activities that make it one of the heavyweights in the Benelux region.

NIB Capital Private Equity is one of the world's largest investors in private equity. But it is still ambitious. ?We wanted to build a business with a dominant global position,? says Wim Borgdorff, managing partner of the firm's Global Fund Investment Scheme. The firm was set up in 1999 by its two founding shareholders, Netherlands-based ABP and PGGM, two of the largest pension funds in the world, with approximately €135bn and €45bn of assets under management respectively.

To get a sense of NIB's scale, here are some numbers: of the firm's €14bn under management, €11.5bn is allocated to its global fund investment scheme, focusing on Europe, the US and South East Asia across all stages, with a further €900m allocated to co-investments. The firm currently aims to invest between €1.5bn and €2bn annually, ?to ensure that each vintage gets sufficient allocation.? A further €1.5bn is committed to its local market, encompassing the Benelux countries and Germany. This last element clearly places it among the most powerful investors in the region.

NIB does not typically make fund investments in the Netherlands or Belgium, preferring instead to work on direct investments. ?In the mid-market sector, there is little alternative to our own focus area and very few of the private equity funds are restricted to investing solely in the Benelux,? states Borgdorff. The firm has thus far not made many investments in the region but that now looks set to change. ?Last year was very slow. We saw everything, but little we felt was attractive. At the start of 2003, that perspective changed and now we see ample opportunities. The quality of the assets has improved and there is more realism among vendors over valuations.?

Growing realism among vendors bore fruit for NIB earlier this year. In April, it backed a €315m MBO at Getronics HR Solutions, the largest provider of payroll services in the Netherlands. The business was acquired from Getronics, a distressed seller struggling to meet bond repayments. ?The business has very attractive cashflows and was the jewel in the Getronics crown.? However, one Netherlands-based GP was not so optimistic, saying that, ?at five times sales and ten times earnings?, the business was ?totally overpriced? for a distressed transaction. ?I don't think that is the case,? counters Borgdorff. ?I can't give precise details, but there is a lot of cash in the business that has been factored into the price. Often, unsuccessful bidders are inclined to imply that you have overpaid.?

One of the aspects of the Benelux that might prove difficult for NIB is its size. Belgium and the Netherlands combined generated buyout activity, including large buyouts, of just over €1.4bn

in 2002, according to Initiative Europe. Can a market of this size provide NIB with the range of opportunities required to implement its investment strategy? One practitioner is not so sure. ?Given their mid-market focus, they may well struggle to find enough opportunities in their sector.? Nonetheless, Borgdorff remains optimistic. ?The decline of the capital markets has meant that an increasing number of businesses are realising that they need to accept private equity as a financial alternative.?

In terms of its indirect investment, NIB Capital has previously shown a preference for US fund investments over European. At the end of 2000, the private equity division had committed €3.6bn to the US, compared with €3.1bn to European funds. It has invested fairly evenly across venture capital, small and larger buyouts, with a slight preference for small-cap buyouts (€2.9bn in total).

Borgdorff says that in their global buyout co-investment program, NIB's geographic focus is now shifting. ?Europe is definitely more attractive than the US at present. In terms of buyouts, US dealflow is slow.? Recently, this strategy has produced commitments to B&S Private Equity's €500m Fund IV for Italian buyouts, Terra Firma's debut fund and Barclays Private Equity's €1.25bn fund, closed last December.

On the venture side, the group remains keen on the US. Last year it selected Grove Street Advisors, the venture capital gatekeeper that also acts for CalPERS, to invest $100m in US venture funds over the next year. ?The US venture market is better-positioned to recover [than Europe] because it continues to have strong research centres, very experienced GPs and a dedicated group of investors who can look beyond the downturn. We think there's a place for VC in Europe, but we're more selective.?

NIB's landmark investment in 2003 so far came when it backed the €1.5bn acquisition by MidOcean Partners of a portfolio of around 80 direct investments from Deutsche Bank. The deal was the culmination of a strategy implemented in 2001. ?We came to the conclusion two years ago that the secondary market was likely to grow rapidly for a number of reasons. Out of our overall mandate, ten per cent of our €11.5bn set aside for fund investments is available for secondaries. We've invested with a few of the main secondary players such as Coller and Lexington to get close to them,? says Borgdorff. NIB invested €312m in the Deutsche Bank secondary transaction. Borgdorff says he expects to invest the remaining two thirds of the allocation over the next two to three years.

Borgdorff clearly feels that NIB's position amongst the buyside is strong. ?We see the full spectrum of opportunities on a global basis,? explains Borgdorff. ?We like where we are.?