Q&A - 2008 faces slowdown, not a crash

Q: With regard to 2007, what is your view of the Benelux private equity market and what do you expect for 2008?

A: The first half of 2007 was very busy, however the sub-prime crisis came along in the summer. This has impacted on the big deal markets. Now, the Dutch and Belgian markets are characterised by small and mid-cap transactions (deals ranging between EUR50m and EUR300m). Mega deals, especially in Belgium, are rarer. Usually there are only one or two mega deals per year in the Belgian market, such as the EUR800m acquisition of Taminco, led by CVC Capital Partners last August and the secondary buyout of Bureau Van Dijck Electronic Publishing for EUR700m. These kinds of deals form the upper end of the Belgian market, whereas in the Netherlands we see much larger deals, such as the sale by Philips of its semi-conductor division for EUR7.4bn and the sale of The Nielsen Company to Valcon Acquisitions for EUR8.6bn.

In smaller markets in the small and mid-cap deals in Belgium, and to some extent also the Netherlands, it is expected that the credit crunch will have a lesser impact. 2008 will probably be marked by a slowdown, but not by a crash.

What is noteworthy is that Belgian banks participating in the leveraged buy-outs are often relatively small and do not have the problems that big banks such as Citigroup or Merrill Lynch may have. So they will still be prepared to invest and get involved in leveraged buy-outs, albeit under changed conditions. Whereas it was perfectly normal in recent years to see highly leveraged deals with 80% of the deal financed by the banks, the private equity funds will now have to put in a bigger equity investment.

Q: What is the difference between the Belgian, Dutch and neighbouring markets?

A: The Dutch market has a long tradition of private equity and can be described as a professional and mature market. The system is well anchored in the economy.

Belgium is a bit different. It only started to develop its private equity market more recently and it has only started to mature in the past few years. On top of that it is necessary to distinguish the Flemish from the Walloon regions. The Flemish region generates most of the private equity transactions for Belgium. The reason for that is that there are more family-owned businesses in modern sectors such as the service sector and innovative technology-driven sectors. These types of sectors appeal to private equity houses.

The Walloon region used to be less attractive because most economic activity was still concentrated in old industries that are less appealing to financial investors. However, the climate in the Walloon region has started to change and it can be expected that more private equity investments will take place there in the years to come.

Comparing Belgium with France, the 2006 market size was EUR1.5bn to EUR10.8bn. Even if you compared in terms of population, it is less developed.

Q: What sectors are attractive and have the greatest potential in 2008?

A: I don't think we can say that this or this sector is more or less attractive. Private equity houses are more attracted to companies operating in the service sector and sectors driven by innovation. However, a more important difference is in the shareholding. In Belgium, especially in the Flemish part, there are many family-owned businesses that want to globalise or meet succession problems. These kinds of family-owned companies are great opportunities for private equity investors.

There are lots of Dutch and Belgian private equity houses active in the Benelux mid-market, such as AlpInvest, Gilde, GIMV, Fortis, KBC, NPM Capital, etc. The market has always been split between the lower, the mid-, and the higher end of the market. Private equity deals will be more expensive to finance at the higher end. So the private equity houses acting in the higher end of the market will probably look for smaller transactions. This could affect the competition on the mid-market.

The second point is that the credit crunch is affecting the valuation of companies. With less financing available on the market, deals will become cheaper, or we should say less expensive taking into account the very high valuations we have seen in recent years. The valuation may drop by 10%-15%. Private equity houses will no longer be able to derive their profits from the leverage effect on their financing, but will have to earn money on the companies themselves, increasing the importance of a careful valuation. More careful valuations will make companies more interesting again for investors. The fact that companies will be valued at a fairer price will also increase the potential for industrial buyers to compete with the financial investors in their bid to acquire a competitor or a compatible business.

Q: As a lawyer, what do you think the legal developments will be, especially regarding the code of good practice that will be released next May?

A: The request for a code of good practice has not been a hot topic in Belgium compared with the press coverage in Germany and the UK about this subject. In the Netherlands there has been more attention paid to the issue because of the greater involvement of aggressive hedge funds over there and it can be expected that the Benelux countries will follow once countries like Germany and the UK have implemented increased transparency provisions and corporate practices for private equity funds. For the moment, however, it is not considered a priority.

- Erwin Simons is a partner in the corporate team of law firm DLA Piper's Brussels office.

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