This is NautaDutilh Belgium's fifteenth Private Equity & Venture Capital Barometer. After our spring 2014 Interim Report, we decided to survey, on a quarterly basis, a select group of private equity and venture capital players, asking about current and expected trends in their practice. This issue shares highlighted results from the second quarter of 2018 (Q2 2018).
NautaDutilh is organising a seminar on 8 November 2018, on which occasion our private equity team members Elke Janssens, Philippine De Wolf and Ken Lioen will guide you through the extensive changes the new Company code entails. It goes without saying that the reform will affect all Belgian companies in various ways. This is a great opportunity to assess the challenges and opportunities presented by the new code. Click here to register.
Elke Janssens T: +32 2 566 81 50, M: +32 478 99 63 45 E: firstname.lastname@example.org
Nicolas de Crombrugghe T: +32 2 566 81 86, M: +32 485 50 67 15 E: email@example.com
Sophie Jacmain T: +32 2 566 81 94, M: +32 497 51 47 73 E: firstname.lastname@example.org
Yoanna Stefanova T: +352 26 12 29 51, M: +352 621 55 49 51 E: email@example.com
The Q2 2017 Barometer refers to NautaDutilh Belgium's eleventh Private Equity & Venture Capital Barometer, available at https://www.nautadutilh.com/globalassets/barometerbelgiumq2_2017_a4.pdf The Q3 2017 Barometer refers to NautaDutilh Belgium's twelfth Private Equity & Venture Capital Barometer, available at https://www.nautadutilh.com/siteassets/documents/brussels/barometerbelgiumq3_2017_a4.pdf The Q4 2017 Barometer refers to NautaDutilh Belgium's thirteenth Private Equity & Venture Capital Barometer, available at https://www.nautadutilh.com/globalassets/barometerbelgiumq4_2017_a4.pdf The Q1 2018 Barometer refers to NautaDutilh Belgium's fourteenth Private Equity & Venture Capital Barometer, available at https://www.nautadutilh.com/sites/nautadutilh.com/files/inline-files/barometerbelgiumq1_2018%20%281%29.pdf
Acquisitions and exits
Q3 2017 Q4 2017 Q1 2018 Q2 2018
Q3 2017 Q4 2017 Q1 2018 Q2 2018
Based on transactions reported in Q2 2018,
As reported in our previous barometers, multiples,
acquisitions exceeded exits by 4%, continuing a trend insofar as they are disclosed, are still high, in
we first noticed in Q4 2015. However, while in Q1 2018 some cases extremely so. This reflects high seller
exits dropped slightly to 41% of reported transactions, expectations, which are attributable in part to the
in Q2 2018 exits rose to 46%. It should be noted,
competition between private equity players for quality
however, that a considerable number of exits relate
investments and the willingness of some corporates to
to secondary buyouts, i.e. deals in which the target is meet these expectations. It is interesting to note that,
sold between private equity players. In reality, therefore, in most cases, the deal value is not disclosed to the
the number of acquisitions is substantially higher,
public. This appears to be an ongoing trend, which we
suggesting that the acquisitions phase on which we
0 10 20 30 40first reported in Q1 is still going strong.
mentioned in previous barometers.
PitchBook's European PE Breakdown for Q2 2018
Overall, 2017 was a very successful year for the
confirms the record-setting number of secondary
private equity sector, with a substantial rise in exits,
buyouts in Q2 and the rise in top-end deal values.1
from 32% of reported transactions in Q1 to 45% in
Due to substantial investment in 2014-2017, a high
Q4, peaking at 49% in Q3. Private equity players are
number of exits is expected in the coming years, with
currently holding large amounts of dry powder and
an increase in secondary buyouts.
seeking investment opportunities, which could explain
the rise in acquisitions. In addition, the number of
According to EY's latest Barometer of Belgian
secondary buyouts indicates that many private equity Attractiveness, an annual report by EY that measures
players targeting smaller businesses have successfully Belgium's attractiveness as an investment location,
managed to stimulate growth, resulting in attractive
Belgium attracted a record 215 investment projects in
opportunities for private equity funds interested in
2017, generating nearly 6,000 new jobs. The figures
indicate that investors view Belgium as a good place
1 T he full report is available at https://pitchbook.com/news/reports/2q-2018-european-pe-breakdown.
Private Equity & Venture Capital Q2 2018 Barometer | Highlights 2
to do business. According to the EY barometer, transportation, chemicals, professional services, pharma and the digital sectors (in this order) are the key drivers of activity. It should be noted that these sectors differ from those indicated by the respondents to our barometer.2
Sectors with the most PE/VC activity
Since Q1 2017, life sciences, technology and IT and manufacturing have been the most popular sectors for PE/VC players. This trend continued in Q2 2018.
In Q2 2018, the four sectors with the most PE/VC activity were (i) technology and IT, (ii) life sciences, (iii) agriculture and food production and food processing, and (iv) manufacturing. These results are very similar to the previous quarter, when the sectors with the most PE/VC activity were (i) technology and IT, (ii) life sciences, (iii) manufacturing and (iv) agriculture and food.
In Q1 2018, the agriculture and food sector entered the top four for the first time. This sector was even more successful in Q2 2018, which could indicate a growing interest by PE/VC players in less traditional sectors.
Respondents continue to report substantial PE/VC activity in the technology and IT sector. The most important deals in this sector covered by MergerMarket and the press included:
- the sale of French IT group Exclusive by Cobepa and others to Permira for EUR 1.3 billion;
- Hummingbird Ventures' sale of GramGames, a Turkish game developer, for EUR 220 million;
- GIMV's acquisition of a majority stake in One of A Kind Technologies, a Dutch tech company specialising in machine vision;
- KeBeK's acquisition of a stake in CHP, a Belgian provider of machine lubrication solutions, mostly for the food and beverage sector;
- Korys'3 acquisition of a stake in Mimetas, a Dutch
Technology & IT Retail & wholesale
Life sciences Healthcare
Manufacturing (excluding automotive) Cleantech
Business & professional services Media & entertainment Energy & utilities Chemicals
Real estate/construction Infrastructure Automotive
Transport & logistics Telecom
Financial products & services Agriculture & Food
0 10 20 30 40 50 60 70
Q3 2017 results Q4 2017 results Q1 2018 results Q2 2018 results
Percentage of respondents (normalized, multiple answers allowed)
2 A vailable in Dutch at https://www.ey.com/Publication/vwLUAssets/EY-barometer-van-de-belgische-attractiviteit-juni-2018/$FILE/EY-barometer-van-de-belgischeattractiviteit-juni-2018.pdf.
3 T he investment vehicle of the Colruyt family.
3 Private Equity & Venture Capital Q2 2018 Barometer | Highlights
start-up which creates three dimensional models of organs to facilitate pharmaceutical testing; - GIMV's acquisition of a majority stake in Laser 2000, a German provider of laser and photonics solutions.
The technology and IT sector also witnessed a number of capital increases which were covered by the press:
- American venture capital fund Insight and British fund Dawn invested USD 33 million in Showpad, a Belgian software developer, to finance its acquisition of American software company Leancore;
- FPIM, PMV and others invested EUR 25 million in UnifiedPost, a specialist in document treatment and payment solutions, in preparation for a possible IPO;
- Draper Esprit, Balderton Capital, Next-World Capital and Newfund contributed USD 29 million to Aircall, a software developer specialising in the integration of telephony in other business applications;
- Technological growth fund Epimde carried out a EUR 20 million capital increase thanks to investments by Meusinvest, SFPI, Ethias, Integrale and BNP PF Private Equity.
As in Q1 2018, the life sciences sector held second place. This sector has consistently featured in the top four. Although there were not a lot of deals in this sector in Q2 2018, there was a fair amount of investment and fundraising:
- a n EUR 82 million investment by Droia Oncology Ventures in PACTPharma, an American company specialising in immune-oncological cancer treatment;
- a EUR 17 million investment by SRIW, Theodorus, Sambrinvest and others in ChromaCure, a ULB spinoff that researches anti-cancer molecules;
- a EUR 64 million investment by HBM Partners, 6 Dimensions Capital and Curative Ventures in iTheos Therapeutics, a UCL biotech spin-off;
- a EUR 7.2 million investment by SRIW, Theodorus, Sambrinvest, InvestSud and others in Epics Therapeutics, a new ULB spin-off that researches
cancer treatments; - a EUR 13 million fundraising by Fonds Vives II,
SRIW, Nivelinvest, Seventure Partners and others for A-Mansia, a new UCL spin-off specialising in the treatment of obesity.
In addition, in Q2 2018, American private equity fund Great Point Partners acquired a EUR 21 million stake in MaSterCell, a Belgian cell therapy manufacturer.
The agriculture and food sector witnessed substantial PE/VC activity in Q2 2018, moving from fourth place to third, with some of the most high-value deals reported. Noteworthy deals included:
- JAB's4 acquisition of British sandwich and coffee chain Pret A Manger for EUR 2 billion;
- E rgon's acquisition of Beltaste, snack producer known for its Vanreusel brand;
- K haris Capital's acquisition of French fast food chain O'Tacos;
- Sofindev's acquisition of Group Claes, a supplier of ingredients and machinery to food processing companies;
- S iena Capital's5 acquisition of Flora Food Group (Unilever's margarine division) for EUR 250 million.
Finally, in the manufacturing sector, which held fourth place in Q2 2018, a number of important transactions were reported, although deal values were generally not disclosed:
- Down2Earth's acquisition of a stake in Metes, a machine manufacturer;
- the acquisition of a majority stake in Indo Optical, a Spanish contact lens maker, by Ergon Capital Partners III;
- Creafund's acquisition of Aalterpaint Group, a paint manufacturer;
- D own2Earth Capital's sale of ConTeyor Multibag Systems, a manufacturer of industrial packaging systems.
4 The family investment vehicle of Alexandre Van Damme (AB InBev). 5 G BL's venture capital fund.
Private Equity & Venture Capital Q2 2018 Barometer | Highlights 4
The private privak reform and private equity investment
In 2003, Belgium introduced an unlisted closed-end investment fund (the private privak) which, due to its corporate and tax features, was intended to encourage Belgian and foreign investment in unlisted Belgian or foreign companies. The purpose of the vehicle was to enable the investment of private equity through an unlisted company, without the need for investors to set up and manage their own company for an indefinite period of time. In the Summer Agreement of 2017, the Belgian government decided to make the private privak more attractive by aligning it more closely to comparable foreign investment funds. To this end, the Act of 26 March 2018 (the Act) amends both the corporate and tax treatment of the private privak in order to make the vehicle more attractive for investment in private equity and growth companies. The following amendments entered into effect retroactively on 1 January 2018, and are intended to give a renewed boost to the private privak.
- Prior to the Act, the maximum term of existence of a private privak was 12 years, at which time shareholders had to exit the fund. In keeping with other investments funds (such as the recently created real estate investment fund), the Act allows investors to extend the life of a private privak and postpone their exit twice, each time by a period of three years (for instance, in the event of unfavourable market conditions), provided the fund's articles of association allow this possibility.
- The extension of the term of a private privak must be approved by 90% of the votes cast representing at least 50% of the share capital. In other words, unanimity is not required.
- Prior to the Act, it was not possible for a private privak to acquire a controlling stake in a portfolio company. A controlling stake is determined with
reference to factual criteria such as the possibility to appoint (a majority of the) directors. This prohibition was the most important reason why the private privak was not widely used. The Act abolishes this prohibition. As a result, the private privak may now be actively involved in the management of portfolio companies, e.g. through representation on the board of directors or the provision of consultancy services.
- A private privak must register with the federal tax authorities. The Act stipulates that a private privak can be established and exist prior to registration but cannot make any investments until the registration process is finalised.
- The finance minister has stated that, in the near future, the minimum investment threshold of EUR 100,000 will be lowered to EUR 25,000.
- In order to compensate investors for the risk associated with new contributions in cash that partially represent capital, a tax reduction of 25% of the losses incurred (capped at EUR 25,000) is granted. - While the lower dividend withholding tax rate of 15% or 20% (the so-called VVPRbis regime) initially applied only to direct investments, the Act extended its scope of application to indirect investments (such as those held through a private privak). - Prior to the Act, liquidation of a private privak could be complicated as the tax requirements (such as a maximum liquidation period of 12 months) differed from the regulatory requirements. The Act aligns the tax and regulatory conditions to allow more time to finalise the liquidation process.
In order to benefit from a number of modifications introduced by the Act, such as the possibility to extend the term of a private privak to 12 years, certain steps must be taken. Do not hesitate to contact us should you have any questions in this regard.
5 Private Equity & Venture Capital Q2 2018 Barometer | Highlights
What the new Company Code means for private equity
The bill on the new Code of Companies and Associations, which is expected to be approved by Parliament in the course of October, modifies the rules on director's liability. In future, the members of a corporate organ can be held jointly liable (rather than jointly and severally liable), and individual managers can only be held jointly liable in the event of a violation of the law or the company's articles. Last but not least, it is expected that director's liability will be capped, based on the size of the company, with a maximum of EUR 12 million, but this point is still under discussion. In addition, the bill and its legislative history shed light on the:
- new rules on the distribution of profits (including, amongst other things, a new 12-month liquidity requirement, in addition to the current net assets test); - amended rules on the appointment and removal of directors; and - new capital requirement rules, the possibility to incorporate companies without capital and the potential tax consequences of the BEPS debt/equity ratios.
After having declined sharply from 19 to 14 (Q4 2015), the number of weeks needed to sign/close a deal (from receipt of the information memorandum) dropped further to 11 in Q1 2016 but rose to 17 weeks in Q1 2018. The Q2 2018 barometer revealed a slight slowdown to 18 weeks. This drop is in line with the accelerated deal speed we've noticed over the preceding months. Indeed, we've seen timeframes as tight as 7 to 10 weeks for multimillion-euro deals and fierce competition between bidders for high-quality assets.
All factors seem to indicate that it's currently a seller's market. Other studies confirm fierce competition on a booming M&A market with increased interest in Belgium by foreign acquirers. The Centre for Mergers, Acquisitions & Buyouts of the Vlerick Business & Management School6 recently released its 2018 M&A Monitor, based on a survey of 152 M&A experts in Belgium (the Vlerick Monitor). The Vlerick Monitor7 provides a comprehensive overview of current trends and challenges on the Belgian M&A market. The Vlerick Monitor appears to confirm the results of our Q2 2018 Barometer and indicates an average deal speed of six months for domestic transactions, compared to 7.5 months for cross-border deals.
The most important finding was that the average EV/ EBITDA multiple in Belgian M&A transactions increased from 5.0 (2013) to 6.7 (2017). The number one concern of M&A advisors is overheating of the market. An EV/EBITDA multiple of 6.7 indicates that investors realise a return of approximatively 15% before taking into account investment expenditures. According to respondents, a further price increase will result in returns that no longer outweigh the risks associated with the acquisition. Another interesting finding is that the surge in multiples is also visible in the smallest deals, reaching 5.0 for the first time. Indeed, it appears that companies in the oveQr 4E2U0R161: 1080wmeekilslion segment are being sold at EBITDA mQ2ul2ti0p1l6e:s17owf 8ee.k8s.
6 For more information about the Centre, please visit https://www.vlerick.com/en/research-and-faculty/research-in-action/accounting-finance/centre-for-mergers-acquisitions-and-buyouts/partners. 7 The 2018 M&A Monitor - Shedding Light on M&A in Belgium is available at https://www.vlerick.com/~/media/corporate-marketing/our-expertise/pdf/20180509MAMonitorpdf.pdf.
Private Equity & Venture Capital Q2 2018 Barometer | Highlights 6
Potential non-deductibility of interest related to leveraged recapitalisation
Private equity players often use dividend recapitalisation or other types of leveraged recapitalisation where the target company increases its debt level through borrowing in order, for example, to be able to distribute a dividend or decrease its capital.
Pursuant to Article 49 of the Income Tax Code (on the general conditions for the deductibility of business expenses), a taxpayer must be able to demonstrate that the relevant expense: (i) is related to the exercise of a professional activity (the causal link criterion), (ii) was incurred or borne during the tax period, (iii) was incurred or borne in order to acquire or preserve taxable income (the criterion of intent) and (iv) is authentic and justified, in terms of the amount. This implies that the interest paid must be genuinely linked to the business run by the borrower. Interest payments which do not meet the business purpose test are in general disallowed. In this respect, there is an ongoing debate in the literature on whether interest payments on a loan
concluded to finance a dividend distribution or capital decrease are tax deductible given the abovementioned conditions for the deductibility of business expenses:
- in a recent judgment of 7 September 2016, an Antwerp court refused the deductibility of interest on the basis of Article 49 ITC since the taxpayer has not proved the costs incurred or borne in order to acquire or preserve taxable income, as required by law; - in a judgment of 9 January 2018, a Ghent court refused the deductibility of interest payments, on the basis of Article 49 ITC, intended to finance a super dividend to facilitate the transfer of shares; and - in a judgment of 8 May 2018, an Antwerp court refused the deductibility of interest on a loan extended by a group company to finance a capital decrease and a dividend of EUR 350 million.
Moreover, while interest in tax rulings remains relatively low, it should be noted that more than 75% of respondents currently consider such rulings to be a useful tool. This shift is probably due to a heightened awareness of inter alia the base erosion and profit shifting (BEPS) rules, which will further modify the
Is Belgian ruling practice a factor when considering potential deals?
80 70 60 50 40 30 20 10
0 Q3 2017 results
Q4 2017 results
Q1 2018 results
Q2 2018 results
7 Private Equity & Venture Capital Q2 2018 Barometer | Highlights
tax climate in which companies operate. Regulatory uncertainty is an important constraint in the M&A sector. The Vlerick Monitor surveyed the expected impact of the reform presented by the Belgian government in its Summer Agreement and noted that the expected impact is on average somewhat positive, mainly driven by a future decrease in the corporate tax rate (to 25%) and the introduction of tax consolidation. The BEPS and interest deductibility rules are, however, expected to exert slight downward pressure on takeover activity.
A more worrisome trend (noted for the first time in our Q3 2015 barometer and confirmed by subsequent surveys) is that an increasing number of respondents report post-closing issues, while previously they stated
that, in principle, they do not experience claims under the representations and warranties. Our Q2 2017 survey revealed the highest number of respondents reporting post-closing issues (86%), while in Q1 2018 only 78% mentioned such issues (a drop of nearly 10%). The Q2 2018 results indicate stabilisation at 75%.
While we still do not have detailed information about the underlying reasons for this trend, there are several possible explanations. First, parties are paying more attention to the representations and warranties and tend to negotiate specific (e.g. tax) indemnities. Second, more clients and private equity players are requesting limited due diligence, which means potential issues may not be spotted. Last but not least, the markets on which certain companies operate (including the retail & wholesale and technology & IT sectors) are increasingly complex.
80 70 60 50 40 30 20 10
0 Q3 2017 results
Q4 2017 results
Q1 2018 results
Q2 2018 results
Private Equity & Venture Capital Q2 2018 Barometer | Highlights 8