The Netherlands is consistently ranked as one of the five most active private equity markets in Europe. However, private equity's role in the Dutch economy has not gone unscrutinised; in 2015 two Labour Party MPs presented an "initiative note" to the Dutch parliament in which the private equity sector was portrayed as riddled with undesirable behaviour. Measures proposed by them include limits on interest deductibility, recapitalizations and the use of leverage; strengthening the position of works councils and the reintroduction of the financial assistance prohibition for BVs. As a first response, Minister of Finance Dijsselbloem commissioned a group of independent researchers to carry out a study of the sector.
The group recently released the report of its findings, with generally positive results for the private equity sector:
- Private equity-owned companies generally perform better than their non-private equity owned peers (control group);
- Private equity-owned companies generally have higher leverage than the control group, but this results in only a marginally higher bankruptcy risk, given that private equity sponsors are often directly involved in the company and given their often strong bargaining position vis-à-vis the banks in the event of financial distress;
- Asset stripping, one of the main concerns addressed in the MPs' note as well as the distribution of "super dividends" are not widespread phenomena. In addition, R&D investments do not decrease, but become more focused;
- There is no evidence that private equity is on average bad for employees or other stakeholders.
Obviously, it is up to the government to determine whether new legislation is necessary to deal with private equity activity in the Netherlands. However, in light of the report's findings we do not believe that the Dutch legal landscape will see big changes in this area in the near future. We do expect that the tax rules on the deductibility of interest – particularly in relation to shareholder loans – will be further tightened, in line with the trend in other European countries.
We note that the Dutch private equity and venture capital association, the Nederlandse Vereniging van Participatiemaatschappijen (NVP), has presented three initiatives to the Dutch parliament to improve the sector's reputation. Under these initiatives, the NVP i) plans to improve its communication, ii) has updated the sector's code of conduct and iii) has drafted a document for works councils with information and suggestions regarding private equity takeovers. In response to the present report, it has also undertaken to make a committed effort to gather and provide more data.