Raising capital through private equity is increasingly easy
Dutch companies are increasingly opting for private equity or venture capital. Obtaining capital from a private equity firm for your growing or starting company has never seemed easier than in today’s market. In addition, the current times offer alternative sources of financing such as crowdfunding or seed capital to give creative and innovative startups a fair chance. The amount of capital invested in Dutch companies by private equity firms is the highest since the start of the credit crisis in 2008.
2017 even better than 2016
Figures from the Nederlandse Vereniging van Participatiemaatschappijen (NVP) show that 2016 was an excellent year for private equity houses in the Netherlands. A total of €1.5 billion in new capital was raised by Dutch funds in 2016. In addition, Dutch venture capitalists raised a record amount of over € 725 million. In 2016, 179 Dutch companies received over € 1.8 billion in private equity investments from a domestic private equity firm. 2017 is expected to be even better and even more investments will be made. In the process, another €3.4 billion was raised. Where is all that money?
Preference for big deals
Perhaps unsurprisingly, the vast majority of private equity investments go into large deals, as well as venture capital. With the latter, the high returns of a successful start-up beckon. In a large buyout transaction worth tens of millions, a good portion of the private equity party’s managed assets are “put to work.” The latter is significant. The major players in this market have raised very sizable funds in recent years. often of well over €500 million with peaks, for example, of €1.1 billion for Gilde Buy-out 2015 and €2 billion for Waterland in August of this year.
A private equity fund usually divides its assets from 1 fund over some 10 holdings. Transaction values (including debt financing) in excess of €100 million are then necessary to utilize the entire fund of large parties. And this is precisely where the shoe pinches because the number of transactions of this size is smaller. Everyone is fishing in the same pond to get that one nice big fish which has a price driving effect. For many Dutch companies this is an unattainable size. They operate in the so-called middle market.
Private equity less active in the middle market
The middle market focuses on transactions with equity of around € 5 to € 25 million. The number of (registered) transactions in this market segment involving private equity did increase from 47 in 2015 to 66 transactions 2016. Although a substantial growth, this number is relatively modest with only 20 percent of the total number of transactions over 2016. While many Dutch companies do operate in this market segment in terms of size. The question is what reasons can be identified for the relatively limited interest from private equity.
Investors set strict requirements
Funds that focus on the middle market often set strict requirements. These requirements are necessary because companies in the middle market often carry more risk. First of all, there is often a greater dependence on management. What happens if it falls away? What if there is simply no need to continue operations after the transaction? Or what if the sales market falls away? The sensitivity of these middle market companies is greater. Private equity firms anticipate this and either abandon the transaction or are only willing to step in at a lower price. They are selective in the markets in which they specialize. But they also make hard demands for management involvement. One such hard requirement here is often that not 100% of the shares are sold but that the director-owner remains involved, both in the day-to-day management of the company and also as a (minority) shareholder.
Other options for the middle market
If you are a director-owner of a medium-sized Dutch company and are considering a sale, you roughly have three options:
Grow to a level with an operating result above €3 to 4 million. With this, you can count on a lot of private equity attention
Selling a (partial) interest to private equity and jointly achieving further growth with a final sale after approximately 5 years, the so-called ‘pre-exit’.
Selling to a non-financial buyer, a so-called strategic party
Each shareholder will make its own considerations here. Depending on the status of the company, but also on the personal considerations of the seller, it is important to select the right buyers. Sometimes these may indeed be private equity parties, but if you are one of the many middle market companies pursuing a 100% sale, map out your other options as well.
Would you like to speak with us without obligation? Then call Clifton Finance: Maarten Vijverberg +31 6 55853074 or Gonneke van der Lee +31 6 52466518.