Dutch small-cap buyouts see values soar

The Netherlands is on track to break its post-crisis record for the aggregate value of small-cap buyouts in 2018. The first nine months of the year saw the completion of 21 buyouts valued at less than €25m, for a total value of €394m, compared with 27 deals for a total of just €362m in the same period in 2017.

Aggregate value in this segment was relatively flat between 2013-2016, trending slightly downwards from €311m in 2013 to €216m in 2016 before spiking to €440m in 2017. However, deal volume and value generally moved in step with one another during this period, whereas 2018 appears on course to exceed 2017's value with fewer deals.

Mels Huige, partner at Active Capital Company explains one reason for higher valuations: "Compared with a few years ago, we are seeing more new funds being set up [that are] generally quite sector-specific or have a precise investment strategy. This intensifies competition and brings valuations up. Valuations have not reached the multiples seen in the mid-cap space. Nonetheless, businesses are currently being bought at up to a maximum of 8x EBITDA." This level of pricing is a new dynamic for the small-cap segment of the Dutch market and offers an explanation for the valuation spike recorded in 2016-2017.

Cilian Jansen Verplanke of Karmijn Kapitaal, a sector-agnostic GP that invests in Dutch companies with gender-diverse management teams, underlines the value in developing a niche: "In such a competitive environment, it is important to have a differentiating aspect to your investment strategy."

New GPs might also differentiate themselves by using non-standard fund structures. This can give them an edge in auctions that might otherwise be decided on price alone. Rutger de Vos, partner at industrial-focused GP Anders Invest, says: "We do equity investments for the longer run. To avoid having to exit at a specific time, we have structured our fund as an evergreen vehicle. We think it is most beneficial for all stakeholders to have a stable and long-term shareholder structure."

Getting intimate
Another way to gain an advantage in a high-price environment is to cultivate a sector specialisation. Sector-specific funds, by their very nature, have a more intimate knowledge of their targeted industry and are therefore well-positioned to source proprietary deals. But specialisation can also provide leverage in an auction setting, says Active's Huige: "To demonstrate what kind of added value individual GPs can provide to the business is increasingly becoming a determining factor to win a deal."

Even with these measures, prices – and therefore debt levels – have been creeping up and industry players agree that Dutch banks are being increasingly aggressive. The equity-to-debt ratio sometimes sees debt reaching 60% and capital structures are increasingly resembling pre-crisis arrangements.

To demonstrate what kind of added value individual GPs can provide to the business is increasingly becoming a determining factor to win a deal" – Mels Huige, Active Capital Company

While management teams and owners in the mid-market are more open to a discussion concerning private equity backing, small-cap management teams in the Netherlands have historically been less inclined to pursue sales to fund managers. This is partly due to negative media portrayal of private equity, fuelled by views expressed in parliament by some of the country's politicians, as was recently explored by Unquote.

Says Anders Invest's de Vos: "Despite the fact that the Dutch private equity market is very mature, the industry has been under scrutiny for some years now, with its role publicly debated in the Dutch parliament." As a result, Dutch and international GPs continue to be faced with the task of justifying their activity when approaching small-cap businesses by clarifying the long-term growth opportunities achieved by private ownership. This makes the market even more difficult for international private equity firms looking to set up shop.

Karmijn's Verplanke agrees that the small-cap space is not an easy market to penetrate, and says international players would need to hire Dutch nationals who are familiar with the local language, culture and business environment. On the other hand, Active's Huige suggests that in comparison with Germany, small-cap industrial companies' management teams are more entrepreneurial and open to the possibility of private investment.

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