Alternative lending thrives in the Netherlands

Direct lending has proven an increasingly popular option for leveraged transactions in the Netherlands. According to research by Deloitte, the only European countries to have recorded more transactions involving direct lending in the five years to Q3 2017 – comprising both private-equity-backed and sponsorless deals – are the UK, Germany and France. Furthermore, in the 12-month period up to and including Q3 2017, the Dutch market recorded 21 such deals, compared with 16 in the previous 12-month period and 13 in the year prior to that.

Meanwhile, the GCA Altium MidCap Monitor, reveals that the Benelux region was the fourth most active European market for sponsored unitranche financings in 2017. Of 179 such deals, 12 were provided in the Benelux region, with 70 in the UK, 41 in France and 32 in Germany.

The Dutch market punches above its weight, having embraced alternative lending since it kicked-off in the country in 2014. Max Mitchell, head of private debt at ICG, says: "The combination of entrepreneurial management teams, strong GDP, the long history and culture of international trade, and an efficient legal environment means the Netherlands has always been a key European market for ICG."

Well developed
Indeed, several factors attract direct lenders to the Netherlands. Firstly, direct lending is heavily influenced by the strength of private equity activity. Buyout activity is disproportionately well-developed in the Netherlands, in relation to the size of its economy, compared with the private equity markets of other European geographies – and Germany in particular. According to the EU's statistical office Eurostat, the country accounted for a 4.7% share of EU GDP in 2016, while Unquote Data shows it accounted for 8.1% of buyout volume in the bloc. By contrast, Germany accounted for 21.1% of EU GDP, but just 13% of private equity dealflow.

Secondly, similarly to the UK, the regulatory environment is friendly to direct lenders. Hogan Lovells partner Wouter Jongen, says: "Creditors are not generally constrained by regulatory requirements to lend to professional parties in the Netherlands. Moreover, creditors are able to enforce their legal rights outside and inside insolvency situations. In certain other European geographies, there are some tendencies to be more debtor friendly at times."

Thirdly, the market is more confident with direct lending. ICG's Mitchell says huge steps have been made since non-bank lenders and private capital providers started providing unitranche facilities in the Netherlands, with most private equity investors taking into account the option of direct lending when planning a buyout.

Alternative lending solutions are an additional source of funding in an already competitive market and prices are affected by the dynamic" – Wouter Jongen, Hogan Lovells

Recent buyouts involving alternative debt providers in the Netherlands include Five Arrows Principal Investment's acquisition of insurance services business Voogd & Voogd in July 2017 – for which Ardian and CVC Credit Partners provided leverage – and Parcom Capital Management's acquisition of contract research organisation Viroclinics Biosciences the following month – for which Ares Management joined ABN Amro in providing a package.

While a variety of potential sources of credit present opportunities for private equity houses, the recent advent of direct lending on the Netherlands' debt landscape might also have had an effect on valuations. Entry multiples in Benelux were among the highest in Europe between Q2 2016 and Q3 2017 at 10.4x, with only the Nordic region's 11x average surpassing it during the 18-month period, according to the most recent Unquote and Clearwater Multiples Heatmap Analysis. As Hogan's Jongen says, "alternative lending solutions are an additional source of funding in an already competitive market and prices are affected by the dynamic". Having said this, Jongen argues that equity contributions of private equity sponsors in new deals remain largely at the same relative levels as in the past 18 months.

ICG's Mitchell mostly attributes the high entry multiples to greater macroeconomic trends, explaining that "in an environment of good economic performance, with companies promising profitability, growth justifies the prices". Importantly, the equity debt ratio of deals has remained similar and deals are not currently deemed as heavily leveraged, according to lenders and investors across the board.

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