PE success despite political headwinds in Belgium

Belgium had an eventful and turbulent end to the year politically in 2018 – even by its usual standards. The four-party coalition government fell in December due to its largest party, the New Flemish Alliance, pulling out over objections to a UN migration pact. Prime minister Charles Michel resigned from his post, although he subsequently agreed to stay on and lead the current caretaker government until the 2019 Federal elections in May.

Damien Gaudin, a principal at The Riverside Company, argues the impact for private equity has so far been minimal: "Belgium is used to operating without a government and, in a way, for private equity players this means business as usual, unless one's portfolio company operates in a sector in which the government plays a role, such as education, tax or defence."

Indeed, the country has some experience of caretaker governments: after both the 2010 and 2014 elections, the country took months to create a coalition government, with the 2010 elections taking a year and a half to see the Elio de Rupo government form. "It also means that the current status quo continues until May, which is generally fine for us. Indeed, Brexit is much more of a focus and worry for people at the moment: GPs are assessing how much their portfolio companies are exposed to the UK market," says Gaudin.

Companies in Belgium source and sell extensively from and to the UK market, either directly or indirectly. According to a report by Deloitte published in November last year, Belgium is one of the countries that will be most affected by Brexit: almost 9% of total exports from Belgium are destined for the UK (€32bn in 2017), making it the fourth most important export partner, behind Germany, France and the Netherlands. Dependence on the UK market is especially high for pharmaceuticals, the automotive industry, textiles, carpets, agri-food, and beverages, the Deloitte report says. "GPs are worried about factors such as prices of goods, import and export tariffs, and currency increases," says Gaudin.

Belgian charme
Despite concerns related to political instability in the UK and at home, the effects of which are likely to start to unravel in 2019, a promising factor is that Belgium's buyout market was in rude health last year. There were 17 deals, totalling €3.26bn in value in Belgium in 2018, the third highest aggregate since the financial crisis years: 2017's €4.98bn total value was spread across 25 deals, while 2011 saw €3.68bn deployed across 27 buyouts, according to Unquote Data.

The bar was set very high after the market outperformed in 2017, although this was mostly thanks to four large-cap deals, which alone totalled €3.35bn. There was just one large-cap deal recorded in 2018, which is often the case for Belgium. The mid-market segment saw 13 deals, worth an aggregate €1.2bn, against €1.5bn across 15 buyouts the year before.

In other words, although not reaching the 2017 record numbers, last year showed the market is in good shape. A symptom of this is that Belgium is capturing the interest of foreign GPs. "At The Riverside Company, which has been present in the country since 2006, we can see that competition in the market has become tougher since more foreign investors are backing Belgian companies," says Gaudin. For example, French GP Ardian, with offices in Luxembourg but not in Belgium, has backed three Belgium-based companies since mid-2017, for the first time since 2013.

"French and Dutch GPs are experiencing overcrowded domestic markets and Belgium offers high-quality assets in niche industries, which can quickly scale up internationally – a practice often undertaken by Belgian businesses given the small size of their domestic market. Moreover, French and Dutch GPs can easily open offices in Belgium thanks to the linguistic and cultural similarities," says Gaudin.

The market's resilience to political unrest will certainly be tested in 2019, as the effects of Brexit will start to be felt, but also because it might take some time to form the newly elected government. Nonetheless, the market's high-quality assets and attractiveness in the eyes of foreign investors will be extremely helpful to keep dealflow afloat in the face of political uncertainty.

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

• Topics
• Benelux
• Investments
• Belgium
• Riverside