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Dutch Private Equity Market Report 2003 (English summary)

A total of E1.3bn of new funds was raised in the Netherlands in 2003, a rise of 43 per cent compared to the previous year. This reflects the increased importance of private equity within the Dutch economy, according to the Dutch Private Equity and Venture Capital Association, (NVP).

In 2003, the value of divestments by Dutch private equity firms totalled nearly E1bn, two-and-a-half times the level in 2002. This rise, that points to the tentative recovery of the exit climate, was driven in part by the fact that a number of private equity firms actively sought divestment opportunities. They have shifted their investment criteria towards larger transactions and have reorganised their portfolios. This has emerged from a survey carried out amongst the members of the Dutch Private Equity and Venture Capital Association (NVP) that together have E7.8bn funds under management.

Regarding the developments in the Dutch private equity market, Mr. Robert Schipper, president of the NVP commented: 'The amount of capital being made available for investments in private equity continues to rise. In 2003, E1.3bn of new funds was raised in the Netherlands, a rise of 43 per cent compared to 2002. This reflects the increased importance of private equity within the Dutch economy. Going forward, we expect further growth in fundraising for investments in mature companies also as a result of the increasing level of interest on the part of foreign investors for the Dutch market. Private equity is becoming an ever more important alternative for the capital markets.'

Investments particularly in mature companies
The investment pattern by Dutch private equity companies in 2003 gives a mixed picture. Investments in mature companies rose markedly whilst the level of seed, start-up and expansion financing continued to fall. In total, investments in private equity fell by 18 per cent to E1.1bn.

A clear recovery pattern was seen in the financing of mature companies over the course of 2003, particularly management buyouts. This rose by more than 40 per cent to E782m, equal to the historic high of 2001. With the improving trend in the economic outlook since the second half of 2003, private equity companies are once again being offered more attractive investment propositions. Such opportunities involve not only management buyouts in the context of business succession and the divestment of non-core activities, but also involve the acquisition of portfolio companies by other private equity firms, so-called secondary buyouts.

Investments in young companies, most notably technological-orientated companies totalled E79m, 60 per cent below the level of 2002. Investors have little capital at their disposal to invest in this segment, whilst venture capital companies that are making funds available for seed and start-up financing, are investing extremely cautiously. Such venture capital firms have also defined their requirements more sharply in light of the poor results that they have experienced in the recent past.

Sharp rise in divestments
A number of private equity companies are in the process of repositioning themselves and the focus is thereby shifting towards larger transactions with more emphasis being placed on the ability to demonstrate realised returns in view of attracting external capital. The imminent requirement to report according to IFRS as of 2005 (whereby publicly listed companies must consolidate their majority holdings) and Basel II in 2007 (which lays down higher minimum solvability requirements for banks) are leading a number of banks and insurance companies to consider carefully the position of their private equity firms.

The resultant increase in divestments was also made possible by the gradual recovery of the exit climate. Whilst the capital markets did not yet play a meaningful role, a number of other exit channels were available:

Secondary buyouts; the acquisition of an investment company by another private equity company;
· Strategic buyers; the gradual return of strategic buyers. A number of companies built up significant cash reserves as a result of cost saving measures implemented that were subsequently allocated for acquisitions. The value of stakes sold to (non)-listed companies has returned to the level of 2000, namely E180m.
· (Fellow) shareholders; the (re)sale of stakes to (fellow) shareholders, among them management, has also risen sharply from E52 to E170m.

Private equity: factor of socio-economic importance
The capital that private equity firms invest in the Dutch companies is a factor of great economic significance. At the end of 2003, Dutch private equity companies collectively had E7.8bn funds under management.
· This capital was invested in more than 1,200 companies, of which 80 per cent are based in the Netherlands.
· These companies together generate revenues of E66.5bn about 15 per cent of the gross domestic product; and
· Collectively have almost 400,000 employees, representing about eight per cent of all those employed in the Dutch private sector.

Outlook
The NVP expects that the growth in the buyout market will continue in 2004. With the improved economic environment, multinationals could well identify opportunities to divest non-core activities. Smaller listed companies are becoming increasingly interested in the possibilities private equity can offer as an alternative financing means. In both instances, a buyout can be a solution.

A trend that has clearly emerged in the first few months of 2004 is the increasing level of interest from foreign, most notably American and British, private equity houses for the opportunities that the Dutch market offers. Fundraising for buyouts and late stage investments will also grow partly as a result of the interest for the Dutch market from foreign investors.

Investors for seed and start-up financing are expected to remain cautious. The NVP hopes that the set of measures drafted by the Ministry of Economic Affairs that are designed to stimulate 'techno starters', will contribute to the recovery of the financing possibilities for companies in the seed and start-up phase.

If the more positive economic outlook becomes reality, than the divestment of investment companies to strategic buyers will increase. Furthermore, secondary buyouts will command a fixed position on the list of exit possibilities. A recovery of share prices is expected, to a certain extent, to lead to new exit possibilities for private equity firms. IPO candidates are likely to weigh the positive and negative implications of a listing against each other more critically than in the past.

For more information, or to obtain a copy of the complete report, please visit www.nvp.nl