The flow of financial sponsor-backed deals in the Benelux region – comprising the Netherlands, Belgium and Luxembourg – has be en staunched for the last two quarters. The $87 million-worth of deals done in the second quarter of this year, according to data provider Dealogic, was half the total recorded in the same period of 2008. And that figure was itself low compared with the $6 billion transacted in 2007.
“Over the last couple of months there have been very few deals that have closed,” says Floris Muijser, a partner at Netherlands-focused private equity firm Egeria. “And those that have closed have mainly been vendor-financed.”
As is the case in many other markets, a combination of factors has put the stopper on deals. The ongoing constraint on bank lending is one. A second is that earnings are still too unpredictable.
“The key problem [at the start of the year] was profits,” says Bas Glas, a partner at Netherlands-based private equity firm Gilde Equity Management. “What are the profits you have to base your bid on?” Glas describes most sale processes around the beginning of the year as “just stopping”.
The gulf between vendors' price expectations and bidders' valuations is scuppering many sale processes. “There are still sellers who think they can sell for seven to eight times EBIDTA,” says Hubert Verbeek, managing partner of Dutch mid-market firm Holland Venture. “I don't think this is realistic at this moment.” Or as Egeria partner Mark Wetzels puts it: “A good entrepreneur knows that now is not the time to sell.”
But while the deal flow numbers do not paint a promising picture for the current level of activity in the Benelux region, there are early indicators that things may be about to pick up. Alain Keppens, head of buyouts and growth at Benelux private equity firm Gimv, says many senior lenders are limbering up after what has essentially been a period of total inactivity: “During the last quarter of 2008 and first quarter of 2009, you couldn't even start a discussion with most of the banks. They said they were open, but in fact they were not.” Now, even though leverage is still low and prices high, there is a “willingness to listen to new opportunities,” he adds.
If you look at GDP and employment figures [for the Netherlands] it's getting worse and worse. I don't think we have seen it all
Even with banks re-opening their doors to business, GPs are adjusting to a new reality of increased equity cheques and reduced leverage. “I used to leverage deals by four to five times EBITDA, with covenant-lite structures and nice pricing,” says Verbeek. “Current leverage is maximised at two or three times. Maybe if the asset is really low risk, maybe four times, but the transaction fees are unacceptable.”
Alongside tentative positive signals from lenders, GPs are reporting that pipelines are once more filling up, which could herald a revival of deal activity as the calendar ticks over to 2010. The source of these deals has changed significantly, with GPs working hard to generate proprietary leads. Verbeek describes a shift away from deals intermediated by corporate finance boutiques and banks towards direct discussions with entrepreneurs and other shareholders. He says more than 50 percent of his pipeline is now proprietary. This trend is echoed by other participants in the marketplace.
But while deals in the pipeline may be increasing, private equity firms have not yet been faced with the deluge of distressed assets – or distressed sales of healthy assets – that many predicted. Verbeek says that just 10 percent of the deals Holland Venture is currently eying are encountering any sort of distress, but expects this proportion to increase as the year goes on. Gilde's Glas also predicts an uptick in the amount of distressed sales, as pressure builds on businesses with high leverage and which operate in sectors hit hard by the downturn. “[Sellers] have held on for as long as they can,” he says.
Marc Staal, Amsterdam-based managing partner of mid-market private equity firm AAC Capital Partners, agrees that those vendors resisting the prospect of selling healthy assets are now reassessing their options. “We are now seeing the first signs of stressed sellers of some interesting subsidiaries,” he says. “Until now, if you could avoid selling you would not be in the market.”
Egeria's Wetzels, however, warns against the expectation that private equity firms will be able to scoop up assets at very low valuations, because there are enough buyers in the market to make sale processes competitive. “I do not believe in goodies … free lunches,” he says. “The market is too transparent for that.” Judging by the amount of dry powder in the coffers of the region's most active players, Wetzels' assertion seems reasonable. His firm is currently finalising the first deals from its €500 million third fund, which closed in the fourth quarter of 2008.
A good entrepreneur knows that now is not the time to sell
Meanwhile, Gilde still has half of its €150 million 2006 Benelux fund to invest and Holland Venture is about to begin investing its €70 million fifth fund. AAC Capital Partners is currently sitting on around €600 million in dry powder, albeit to be invested also across its other target regions of the UK and Scandinavia, and Gimv has now garnered €570 million for its new Flanders-focused growth equity vehicle The Gimv-XL Fund.
MEN VS BOYS
Looking at the downturn from another perspective, Glas views this year as “separating the men from the boys” in terms of corporate performance. “Towards the end of this year we will see the winners in the market: the companies that have been able to keep profits up in bad times,” he says, “Then you can say ‘this is a profit I trust’.”
While lenders and vendors show signs of life, the macroeconomic picture looks less rosy for the near term with no sign of improved trading conditions for portfolio companies and negative GDP growth forecast for 2010 across the two dominant Benelux markets of the Netherlands and Belgium. “If you look at GDP and employment figures [for the Netherlands],” says Verbeek, “it's getting worse and worse. I don't think we have seen it all.”
Gimv's Keppens has seen “no clear turning point” in portfolio company sales figures: “There are no clear signals to give us particular comfort, but what we have seen over the last couple of months is a stabilisation of earnings.”
GPs should be warned off trying to catch the economic cycle as it rebounds, says AAC's Staal. “One reason we are not trying to ride the market recovery is that we do not believe in a short turning point,” he says. “The window of opportunity will be a lot longer than that.” One thing is for certain; when the window does open up, there will be no shortage of private equity capital waiting to take advantage.
BELGIAN FIRM'S NORDIC LINKS
Belgian private equity firm Gimv in August revealed a significant partnership with listed Nordic alternatives firm CapMan. The Antwerpheadquartered firm acquired €17 million-worth of commitments to three CapMan funds and made an additional commitment of €13 million to CapMan's next Nordic buyout fund, CapMan Buyout IX.
As well as gaining exposure to CapMan's funds, Gimv acquired a 4.38 percent stake – worth around €4.4 million at the time of writing – in CapMan itself. The Belgian firm had been building the stake through acquiring publicly traded CapMan shares for a number of months, a spokesman for the firm said. Gimv now intends to build its stake to 10 percent, assuming the shares remain attractively priced and sufficiently liquid, and is also in the process of taking a seat on CapMan's board.
By injecting €17 million into the feeder vehicle, Gimv has effectively bought three “early secondary” stakes. Between the three fund interests in CapMan Technology 2007, CapMan Russia and CapMan Public Market, there is €13.6 million in uncalled commitments and investments worth €3.4 million at June 2009 valuations.
As industry practitioners predict increased consolidation among private equity firms, the tie-up could well be a precursor to greater cooperation between the two firms, such as joint venture funds or a full merger. A spokesman for Gimv declined to comment on any future plans. Watch this space.