Dutch finance minister hails mature PE market

The past year has shown the Dutch private equity market is mature and in good health. According to a 2017 report on activity by the country's private equity and venture capital association, NVP, 92 Dutch companies were acquired in buyout transactions worth €2.7bn. This is the largest volume since 2007, which saw 92 buyouts worth €5.3bn.

In addition, there were 50 sub-€50m investments in 2017, almost double the number seen in 2012, according to Unquote Data. Annemarie Jorritsma, chair of NVP, says: "Our 2017 report shows that private equity is becoming a more popular option for SMEs, as the capital requirement for bank loans has increased and bank borrowing has become more expensive."

The positive statistics will help bolster the Dutch private equity industry, which has faced intensive scrutiny during the past few years. The bankruptcy of several private-equity-backed Dutch companies in 2014 and 2015 led parliament to question the role of private equity in the country's wider market.

A social impact study by the University of Amsterdam judged that private equity had added value as a temporary ownership structure. For instance, between 2007-2015, the amount of the country's GDP accounted for by private equity investments fell between 0.14-0.75%. It also found that the risk of bankruptcy barely increases in private-equity-backed companies and no evidence was found that employees or other stakeholders suffer significant negative consequences from private equity acquisitions.

On the other hand, the leverage of acquired companies also increased, while tax payments declined. There are also potential conflicts with other stakeholders such as employees, financiers and debt capital providers, and between the general and limited partners. The study concluded that, overall, excesses that take place in private equity are mostly deemed "incidental". According to NVP's Jorritsma, the study, as well as finance minister Wopke Hoekstra's response to it, demonstrates that "the industry has found a mature way to report to politicians, the public and the media on its activities".

Cabinet's verdict
Hoekstra's letter to parliament underlines that value can also be added through a more efficient allocation of assets in the economy and more efficient management of companies. The letter addressed some of the recommendations from the University's study. The Dutch corporate governance code for listed companies has been modified to state that, in the event of a conflict of interest between existing shareholders, the director or supervisory director does not participate in the deliberation and decision-making process.

Moreover, the study advises that loans given out by private equity firms, in the event of bankruptcy, should be regarded as equity, subordinating their claims to other creditors. Consultations are being held on this issue.

Private equity is becoming a more popular option for SMEs, as the capital requirement for bank loans has increased and bank borrowing has become more expensive" – Annemarie Jorritsma, NVP

Finally, the finance minister addressed the study's point about interest deduction. Currently, high levels of debt in a portfolio company, and the corresponding interest deductibility, limit the amount of corporate income tax that can be collected. Felix Zwart, responsible for tax at NVP, says there is no generic cap on interest deductibility. In fact, he says: "Several increasingly complicated laws currently place caps on interest deductibility for specific situations. These include the acquisition holding rule that caps interest deduction made by acquisition holdings to 60% of acquisition costs in the first year, declining to 25% in the eighth year."

As a result of new legislation, the interest paid by each company that is liable for corporation tax can only qualify for exemption up to a maximum of 30% of the gross operating profit. The introduction of this measure is expected to lead, on balance, to a structural budget revenue of up to €1.4bn.

Portfolio companies might pay more on financing costs, but they benefit from lower corporate tax rates and a simpler system. Zwart says: "The government intends the simplification of interest deductibility, the lowering of corporation tax and abolishing the dividend withholding tax to improve the general investment climate." The abolishment of the dividend withholding tax would not have a large impact on private equity firms since they are already exempt.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Benelux
• Regulation
• Top story
• Netherlands
• NVP
• tax
• Social Impact