High valuations and market volatility put brakes on Benelux deals

This year has been marked by a climate of uncertainty in the financial sector, inevitably making investors more reluctant to strike as many deals as in 2015 – itself an "exceptional year" for M&A, according to a panellist.

Kristiaan Nieuwenburg, a partner at international private equity firm EQT, said: "You have a little more risk this year compared to last, so investors are more hesitant; but uncertainty is always there to a certain extent – what matters is the way we deal with it."

The best way to do so, other GPs added, is to focus on value creation and industrial development within portfolio companies, which they can have control of, as opposed to macroeconomics and market trends.

We don't expect all bankers to all of a sudden come to Amsterdam. The uncertainty around Brexit is not specifically relevant to the Netherlands, but it creates a broader uncertainty in Europe" - Kristiaan Nieuwenburg, EQT

Another driving element this year was soaring valuations, making it "more difficult for people to step up", according to Nieuwenburg. EBITDA multiples are currently said to be around two to three times higher than during crisis years, now "easily" reaching 10-12x for businesses that perform well, compared to 6-7.5x during crisis years, said participants. As a result, leverage multiples are also higher.

A rising concern among local private equity players is the uncertainty around when these market conditions might change, and what will trigger the end of the current economic cycle. Boris Kawohl, director at 3i, said: "I don't believe we'll be in a stable environment soon; there will still be volatility, but we don't know when this volatility will end."

This, combined with high levels of cash currently available to GPs drives ever-increasing competitiveness over deals. Floris Waage, a partner at Amsterdam-based investment firm Egeria, said: "There's a clear unbalance between quality assets and available cash to invest – and we're all affected by this."

Other speakers highlighted the need to be more selective with investments, with one participant saying there is an increasing requirement for "placing one's bets carefully and mitigating risk". GPs should also be expecting lower returns at the moment, with "good" net returns currently estimated at around 12-13% on average.

Foggy future
Panellists largely shared the opinion that 2017 might bring further political risk and instability. Elections in France and the Netherlands were notably singled out as key events that might tip the balance to one side or the other. The potential rise of extremist parties in several countries was also perceived as a determining factor.

While Brexit was debated at length, the GPs generally agreed that its overall impact on Europe should be watched, rather than focusing exclusively on the Benelux. A panellist said: "There is no immediate effect of Brexit. Of course we are having these conversations, but from a Benelux market perspective it is much more the uncertainty ingredient that comes into play. Macroeconomics in general are driving the market, not just Brexit."

EQT's Nieuwenburg, who claimed that Brexit had so far "not really affected our investment pace", added: "We don't expect all bankers to all of a sudden come to Amsterdam. The uncertainty around Brexit is not specifically relevant to the Netherlands, but it creates a broader uncertainty in Europe."

In spite of the predicted political risks for the coming year, however, attending GPs did not foresee groundbreaking changes for the private equity sector, saying 2017 will likely be quite similar to 2016, with continued low growth, low interest rates and high valuations.

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