Dutch government calls private equity industry into question

Alice Murray
19 March 2015

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Dutch MPs have called for a meeting with private equity heads in an effort to, as one Labour party (PvdA) spokesperson boldly stated, prevent locust behaviour in the country. Alice Murray reports

The discussion has been called following a string of troubled private equity deals in the Netherlands, namely childcare business Estro Group (acquired by HIG Europe in July 2014); waste management company Van Gansewinkel (purchased by CVC Capital Partners and KKR in 2006); department store chain Hema (backed by Lion Capital in June 2007); and publisher NRC Media (acquired by Egeria in 2010).

According to MP Henk Nijboer, private equity uses too much debt and the industry is more concerned with profits than employees and social responsibilities.

On the surface, the situation looks worrying, with Estro falling into bankruptcy last year. Sun European Partners-backed department store V&D, meanwhile, has severely cut staff pay while simultaneously requesting it forgo rent payments. Furthermore, Egeria awarded itself a special dividend of €12.5m in 2012 from its investment in NRC – representing more than double the company's annual profit – however, the business remained heavily indebted.

According to Tjarda Molenaar, the director of Dutch private equity association NVP, these five examples continue to be repeated among commentators to question the private equity industry. Molenaar believes the failure of these businesses was symptomatic of changing market conditions: "The markets changed significantly and the companies had trouble in adapting."

In the case of childcare business Estro, Molenaar asserts that the company suffered because of "abrupt and drastic changes to subsidy schemes," resulting in parents no longer being able to afford the service. "This led to demand falling by 20% and there were bankruptcies across the sector but as Estro is the largest provider, it received the most attention," she adds. Indeed, HIG rescued the company from falling into bankruptcy in 2014. HIG's credit arm, Bayside Capital, had previously acquired 75% of Estro alongside KKR in February 2013 as part of the company's restructuring. Prior to that, US firm Providence Equity Partners had bought the business in 2010, when the company operated under the name Catalpa.

As for retailers Hema and V&D, Molenaar believes they also fell victim to structural changes in the sector. "The arrival of discount retailers and the rise of e-commerce changed the market and traditional retailers did not react quickly enough – we can see the impact of this across the entire retail sector." The case is the same for waste management company Van Gansewinkel. "The company had not foreseen structural changes in the market and could not respond in time," says Molenaar.

Debt woes
With growing debt piles cited as one of private equity's main wrongdoings, PvdA's current argument appears to have forgotten past measures taken to prevent misuse of leverage. In 2011, the Dutch government introduced caps on interest deduction to 60% of the purchase price. "The measures have been adequate and are showing good results," says Molenaar. "We are now seeing leverage ratios moving down to 60% on average, and in the mid-market they are typically around 40%."

Furthermore, in light of MPs accusing GPs of putting profits first, Molenaar explains that paying out dividends is not the decision of shareholders alone : "Since 2011, payouts must be approved by management and if those payouts lead to problems that the management should have foreseen, and that render the company unable to meet its obligations within a year after the payout, management is liable for any shortages and the shareholders have to repay the dividends."

Molenaar is confident that necessary changes to how the Dutch industry works have already been made and that, through these amendments, private equity's case as a supporter of SMEs and a job creator has been made clear.

"The main driver behind the current discussions was V&D's request to lower wages and reduces rental agreements. This was well-covered in the news and raised questions as to what was happening," says Molenaar. According to her, the local press has ignored one important detail – that V&D's backers, which invested in 2010, have had to write off this investment. "They now need to invest more but they need cooperation from other stakeholders to support the company in the short term."

While media coverage around these troubled investments may have been one-sided, thankfully, Dutch MPs are calling for well-informed discussions before further measures are considered.