PRINT THIS PAGE

Private equity overview - The Netherlands 1999

Private equity in The Netherlands is well developed and has shown exceptional growth over the last four years. Here, the EVCA outlines some of the key figures and developments in this important market

The private equity market in The Netherlands is very mature and competitive, having developed comparatively early. The market is characterised by a large number and variety of private equity companies. Following some years of transition, the Dutch private equity market has shown continued and exceptional growth over the last four years. Over the past twelve months, a significant number of smaller specialist venture capital groups has emerged, notably focusing on the ICT sector.

Sources of capital

Of total funds raised (Dfl2.3bn) in 1999, captives accounted for 66.9 per cent, followed by independents at 17.7 per cent. With regard to the source of funds, Dfl1.2bn was raised from banks, with insurance companies and pension funds accounting for Dfl402m. Nearly 99 per cent of the total was raised in The Netherlands, with just one per cent coming from other European countries.

Investment patterns

1999 again saw a record increase in Dutch private equity investment activity. The total amount invested was up from DfI2.4bn in 1998 to Dfl3.8bn in 1999 (an increase of 60 per cent). 355 companies benefited from first-time investments, while a further 341 companies received additional funds. Captives accounted for the majority of funds invested (Dfl21bn, 56 per cent), with independents also representing a significant share of the total amount (Dfl1.4bn, 39 per cent). The market share of public sector funds amounted to three per cent.

Of total investments, Dfl1.2bn (33 per cent) was accounted for by expansion finance. In 1999, Dfl754m was invested for seed capital and start-up funding. The amount invested at the buy-out stage nearly doubled, although the proportion of the companies receiving finance for buy-outs in 1999 was similar to the proportion in 1998 (14.5 per cent as compared to 14.3 per cent).

The most important sectors for investments in 1999 were ICT-related (communications and computer related) and industrial products and services (310 companies in total), with the ICT sector accounting for 27.4 per cent of the total funds invested. A significant decline was seen in the percentage invested in other manufacturing, which decreased from 13.8per cent to 6.8 per cent of the total amount in 1999.

In 1999, Dutch private equity houses invested Dfl1.1bn in other European countries, double the amount of 1998.

Legal and fiscal environment

The Dutch Civil Code allows various legal forms for the incorporation of a new company. In practice, the public limited liability company (NV) and private limited liability company (BV) are most commonly selected, although some projects are financed through a legal form resembling the limited partnership. The shares of NVs are freely transferable, whereas in the case of BV shares, they generally have to be offered first to existing shareholders. NVs and BVs are subject to corporate income tax.

The Netherlands has a fiscal environment that is relatively favourable to private equity firms. Dividends received and capital gains on shares in other companies may be exempt from Dutch corporation tax if the share holding meets certain criteria (shareholdings of at least five per cent, the so-called participation exemption). In other cases, however, withholding taxes of 25 per cent are levied on dividends and capital gains. The effect of corporate income tax and withholding tax can, in certain cases, be reduced by the selection of an appropriate structure between the companies. The network of treaties negotiated to eliminate double taxation can reduce the burden for foreign investors.

Personal tax rates are high, although private shareholders are not subject to capital gains tax provided their shares of total equity and options are less than five per cent. There are some government incentives that attract investment in small and start-up companies. The Dutch private equity industry benefited greatly in the 1980s from the PPM scheme. Since this scheme was curtailed at the end of 1995, two new tax incentives have been created, which both specifically focus on small and start-up companies:

The first is the so-called ‘rich uncle rule', which provides for a certain amount of interest to be received free of income tax by an individual who invests in a start-up company. If, during an eight-year period, the investment is lost, the loss may be taken as tax deductible up to an amount of Dfl50,000. Furthermore, private equity funds (identified by the government) that invest at least 70 per cent in start-up companies are allowed to take tax-deductible losses once the value of participation falls below its original cost. Individuals investing in such funds may claim a higher tax exemption for interest and dividends received than would normally be applied.

The second is that the government has created certain incentives, particularly in the form of grants for so-called ‘technostarter funds'. Subject to certain conditions (eg the fund having a minimum size of Dfl10m), the Ministry of Economic Affairs is prepared to provide up to 25 per cent of the total funding.

During 1998, the Ministry of Economic Affairs initiated the twinning initiative. This initiative, which is funded by the government, private equity houses and institutions is aimed at assisting young fast-growing companies, particularly in the technology sector, to obtain funds to fund initial R&D and growth. Through its success, this initiative has resulted in privately funded initiatives, such as Gorilla Park, to follow suit and become established in the Netherlands.

Exiting

In terms of amount divested at cost, the most common method of divestment in the Netherlands is by trade sale, which accounted for 51.8 per cent in 1999. By its very nature, the mergers and acquisitions market is not very structured, yet there are nevertheless a lot of specialists in the Netherlands. Compared to 1998, the number of write-offs increased significantly. Only 6.9 per cent of the total amount divested was by means of public offering compared to 8.7 per cent in 1998. This is partly the result of the significant undervaluation of ‘old economy' stocks, which has led to IPOs of traditional businesses becoming an unattractive exit option.

The launch of the EURO.NM Amsterdam (NMAX), part of the EURO.NM network, has not yet led to the expected growth in exit opportunities.

Funds raised

This extract is taken with kind permission from the EVCA Yearbook 2000

The European Venture Capital Association's mission is to promote globally and to facilitate the development of the European private equity and venture capital industry through active lobbying and development initiatives. It seeks to help create an entrepreneurial environment in Europe and promote European private equity and venture capital to institutional investors worldwide. For more information, please visit www.evca.com
         
Copyright © 2001 EVCA