Dutch private equity houses are unprecedentedly popular in 2017. Never before has so much money flowed into Dutch private equity houses as in the current year. This means that more money than ever is available to acquire Dutch companies, according to figures from data collector Preqin.
Record amount raised by Dutch private equity
The total amount raised this year is higher than previous years and is well above the level of the previous peak in 2007. So far, €3.4 billion has been raised by Dutch private equity funds in 2017. With this, Dutch investment companies are taking full advantage of the international trend of investors entrusting more and more money to private equity. Due to poor returns on bonds and high valuations on stock markets, investors are seeking refuge in alternative asset classes. The return on private equity is historically higher at around 8.4%, giving the latter conditions in 2017.
However, abundant cash is driving up the prices of companies for sale. Relatively high amounts are paid for healthy companies with growth prospects. The consequence of these high prices is that private equity’s future returns are likely to be lower than they have been so far. A correction in stock markets, geopolitical turmoil or central bankers turning off the money supply too soon could cause prices for companies to fall. Current, high-paying investments then yield less. On a side note, investment companies are not spending the money as quickly now as they did in 2007.
Investors remain eager
Despite the higher risk profile of private equity, investors remain eager. It is relative performance that matters to institutional investors. As long as private equity outperforms equities, there is no reason to shift investments. How high the absolute return is then doesn’t matter much.
Our clients have high expectations about the price when the company is sold
Our clients who learn of these reports expect high prices for the company when it is sold. They hear stories of transactions with high multiples and count themselves rich. As advisors to these clients, we are often tasked with putting these expectations into perspective. After all, the higher multiples are not one-to-one applicable to every transaction. In theory, of course, the multiple depends on the expected performance and growth of the company. However, the risk profile and size of the company also play a significant role here. In addition, companies in the Dutch market are often smaller than companies across the border operating in similar market sectors. This obviously has consequences for the risk profile and the ultimate multiple to be applied.
Average multiple in the Netherlands is lower
Research in the Dutch market shows that the average multiple used in the SME market does not exceed 5. This factor has its limitations, as it is an average across the entire breadth of the market consisting of large well-performing companies to very small and poorly performing companies. Transactions of successful companies are in the range above this factor and thus can count on multiples ranging between 6 and 8. In current market conditions, one thing is certain, and that is that these multiples will continue to rise. A short-term decline is not in line with current macro economic trends.
Would you like to spar with us about a valuation of the company and the determination of the multiple?
Please contact Gonneke van der Lee or Maarten Vijverberg at welkom@cliftonfinance.com.