Development of cross-border buy-outs in The Netherlands from 1997 to 2013

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Development of cross-border buy-outs in The Netherlands

from 1997 to 2013

Otjep Pieterson S1815261

Supervisor: Dr. Hein Vrolijk Co-assessor: Dr. Wim Westerman

University of Groningen, The Netherlands MSc. International Financial Management

MSc. Finance

Uppsala University, Sweden Business and Economics

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Abstract:

This thesis examines cross-border leveraged buy-out (LBO) investments in The Netherlands from 1997 to 2013. I examine three aspects of cross-border buy-outs: how foreign investors are investing, where foreign investors originate and in which industries foreign investors invest. Further, I investigate two variables: the number of deals and the value of deals. I use a sample of 538 LBOs in The Netherlands. Using these, I show that foreign investors account for a significant amount of buy-outs in The Netherlands, ranging between 13% and 52% of the total LBO market.

Additionally, the investments of cross-border investments range between 18% and 99% of the total value of the Dutch LBO market in the sample period. Single foreign investors account for the majority of cross-border LBO transactions. Syndicated investments occur less often, but have higher transaction values in comparison to single foreign investors. Most cross-border investors originate from the United Kingdom and the United States. During the burst of the dot.com bubble in 2000 and after the financial crisis of 2007-2008 the number of cross-border investments

decreases. To conclude, this study provides a detailed overview of the development of cross-border LBO transactions in The Netherlands using a unique dataset of LBO transactions.

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1. Introduction

A buy-out transaction is an investment by a private equity firm in a private company. Buy-outs constitute a segment of private equity, an umbrella term for investors who provide risky capital to non-listed companies (Seretakis, 2014). The buy-out market in the US and Europe has grown substantially in the last two decades, especially in the period 2004-2007 (Seretakis, 2014). An important factor in the growth of buy-outs is the increasing internationalization of buy-outs, as investors are increasingly investing across borders (Stromberg, 2008). In a cross-border buy-out, the investor is located in a different country as the company that is acquired. Cross-border investments pose several challenges for investors. It is more difficult for firms to operate in a foreign country due to institutional and cultural differences (Meuleman & Wright, 2011). Furthermore, specific activities of buy-out investors, such as monitoring and advising their acquired companies are more difficult due to geographical and cultural distance. In addition to the increasing cross-border activity of buy-out investors, more

syndicates are observed; two or more investor’s pool resources, diversify risk or gain entry to foreign market (Stromberg, 2008). Syndicates can consist of investors of the same country, or from different countries. The latter is referred to as cross-border syndicates.

The last two decades have been a volatile period for private equity in general and buy-outs in specific. In this period strong economic growth has been intertwined with two crisis periods. In 2000 the dot.com bubble started to deflate (Scherbina, 2013) and in 2007-2008 the financial crisis caused a worldwide collapse of the financial system (Seretakis, 2014). The financial crisis in 2007-2008 caused a strong decline in buy-out activity in the US and Europe (Bain, 2010). Research has addressed the development of buy-outs in this period. However, the development of cross-border buy-outs in particular has not been addressed.

The aim of this study is to provide a better understanding of the importance of cross-border buy-outs and the development in recent years during a period of substantial growth and two crisis periods. I examine cross-border buy-out activity in The Netherlands. The central research question of this paper is: How has cross-border

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In order to answer the research question I focus on leveraged buy-outs (LBO) transactions. The two reasons for focusing on LBOs are: 1) LBOs make up the majority of the worldwide out market (Stromberg, 2008). 2) Cross-border buy-outs primarily occur in LBO transactions, as I will show in chapter 3. I use a sample

of 538LBO transactions that occurred in the period 1997 until 2013 in The

Netherlands. I examine three aspects of cross-border LBOs in The Netherlands: 1) How foreign investors are conducting cross-border transactions. These investors can invest singly, in a foreign syndicate or in a cross-border syndicate. 2) The origin of foreign investors and 3) the industries foreign investors invest in. I examine two variables of these three aspects of the cross-border market: 1) The number of buy-out transactions and 2) the value of buy-out transactions.

This study extends the literature in the field of buy-outs in several ways. First, I examine a period of 17 years of LBO activity in The Netherlands. To my knowledge, I am one of the first to study cross-border buy-outs for a period of this extent in The Netherlands. Second, I construct a database containing information on cross-border buy-outs in The Netherlands, including information on syndication. Other studies, for example from the Dutch national association of private equity (NVP), exclude a number of foreign investors. Therefore I add to existing literature by providing a broader perspective of cross-border LBO investments in The Netherlands.

The remainder of this study is structured as follows. Chapter 2 will provide a

theoretical background on cross-border buy-outs. Chapter 3 includes the description of the sample and the methodology used in this research to answer the research question. Chapter 4 presents the results of this study. In chapter 5 I will discuss the results and place these in a broader theoretical perspective. Finally in chapter 6, I answer the research question and address the limitations of this study. I conclude with management recommendations and offer suggestions for future research.

2. Literature review

In this chapter I discuss the relevant literature on cross-border buy-outs. In the first section I define buy-out capital and describe the typical structure of a buy-out

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and the factors that influence cross-border flows. In the third section I discuss syndicates.

2.1: Buy-out capital 2.1.1 Definition buy-outs

Buy-out capital is a segment of private equity. The term private equity is not clearly defined in the financial literature and sometimes has conflicting meanings. In some studies private equity refers to venture capital and other private placements such as the buy-outs of private companies. In other studies private equity refers to all the deals that are not venture capital (Aizenman & Kendall, 2008). In this paper I adopt the first approach and define private equity as: “A more general concept that includes

any commitment to unquoted companies, at any stage, from seed investments to replacements, buy-outs and turn-around operations” (Marti & Balboa, p.3, 2001).

Besides buy-out capital, private equity consists of the segments venture capital, distressed investing and mezzanine capital. Venture capital involves early stage investments in new or young companies. Distressed investors invest in companies in financial distress, and mezzanine funds provide financing in the form of subordinated debt, with equity participation in form of warrants (Seretakis, 2014). A more detailed explanation of private equity is provided in appendix A.

The European Venture Capital and Private Equity Association (EVCA) defines a buy-out as follows: “Financing provided to acquire a company. It may use a significant

amount of borrowed money to meet the cost of acquisition” (EVCA, 2013). The

companies acquired in buy-outs are mature companies (in contrast to venture capital investors) and become part of the portfolio of their new private equity owners.

Therefore, these companies are referred to as portfolio companies once the transaction is completed.

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(PTP). An example of such a buy-out is the acquisition of the computer company Dell by its original owners and the private equity company Silver Lake in 2013.

A transaction involving a private firm bought by a private equity firm is called a private-to-private transaction, not to be confused with a PTP transaction (Wright et al., 2006). In the 1980s PTP transactions accounted for approximately 50% of worldwide buy-outs value. However, over time the focus of buy-outs investors has changed towards the acquisition of private firms (Stromberg, 2008).

A buy-out transaction is generally structured as follows (shown in figure 2.1): A private equity firm intends to acquire a target company through a buy-out transaction. The private equity firm can either invest directly or use a Newco (indicated by the arrows). A Newco is a new company specifically created to conduct the buy-out transaction. When a private equity company uses a Newco, the Newco officially acquires the target company and assumes all the debt obligations. The target company becomes a portfolio company and is merged with the Newco, or falls under ownership of the Newco. The private equity firm negotiates with banks, shareholders and

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Buy-outs have the reputation of targeting companies in old and declining industries. Stromberg (2008) contradicts this view and shows that buy-out primarily occur in mature industries such as chemicals, machinery and retailing. Additionally, from 2000 onwards, high-tech sectors such as computers and biotechnology have been growing significantly as buy-out targets (Stromberg, 2008). In another study by Cao et al. (2015), buy-out transactions occur mostly in the industries manufacturing, services and in retail during the period 1995 to 2007 worldwide. However, the industries electricity and gas, retail and transportation account for the majority of the deal value in this period. Bernstein et al. (2010), examine the impact of private equity investors on different industries and found that industries with private equity activity grow more rapidly in comparison to other sector in the period 1986 to 2007 for buy-out transactions in OECD countries. Furthermore, the industries with private equity activity do not seem to be as volatile in industry cycles in comparison to other industries. These findings were found for the US, The UK and Continental Europe (Bernstein et al. 2010).

2.1.2 Types of buy-outs

Buy-outs can be divided in four segments, as illustrated in figure 2.2. The two largest groups are the leveraged buy-out (LBO) and the management buy-out (MBO). The other types of buy-outs that occur less often are the management buy-in (MBI) and the management buy-in/buy out (MBI/MBO).

Figure 2.2: Buy-out segments

From all types of buy-out types the LBO occur most often and have the largest size in terms of deal values (Stromberg, 2008). In a LBO, a private equity firm buys an existing company using a relative small portion of equity and a relative large portion of debt financing (Kaplan & Stromberg, 2008). Usually between 50% and 70% of the total transaction sum (Payne, 2011). Besides debt, private equity firms use their funds

Buy-‐out

Leveraged buy-‐

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to cover the remaining percentage of the price. The private equity firm plans to repay the debt with funds generated from the acquired company’s cash flow or from asset sales. The acquired company usually serves as collateral for the transaction. Hence, the private equity firm will play a significant role in the operations of the acquired firm (Wright et al., 1992). The goal of the private equity firm is to improve operating efficiency and grow revenues during a three to five year time span before exiting their investment (Kaplan & Stromberg, 2008). In the period 1970-2007, around 80% of buy-out transactions in the US and Europe were LBOs. LBO transactions have a strong cyclical nature (Stromberg, 2008). The number of LBO transactions increases in periods when debt is cheaper (Payne, 2011).

In a MBO the company’s management plays an important role in the transaction because it acquires a significant equity stake and obtains control of the company (Wright & Robbie, 1996). MBOs accounted for roughly 20% of worldwide buy-out transactions in the period 1970-2013 (Stromberg, 2008). MBOs differ from LBOs in several ways. First, in a MBO the management of the firm conducts the transaction, sometimes backed by a private equity sponsor. Therefore management acquires the control of the firm. Whereas private equity buyers often have a limited investment period before exiting their investments, management may have a more long-term oriented view. Second, MBO do not display the same cyclical pattern as LBOs. For example, during the economic downturn in the period 2000 to 2001 the number of buy-out transactions worldwide dropped by 25%, while at the same time the number of MBO transactions worldwide increased by 250% (Stromberg, 2008). The

difference might be caused by the size of the MBO transactions, which are generally smaller in size in comparison to LBO transactions and might need less debt financing.

A MBI is similar to a MBO, however, in a MBI a team of outside investors come together to buy a company and subsequently manage it (Wright et al., 1992).

Management buy-ins can be defined as: “the transfer of ownership whereby executive

control of a business is gained by a manager or entrepreneur or a team of managers, who were not working for the company before the transaction” (Wright et al., 1992).

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MBIs. These are called MBI/MBO (BIMBO) and involve both sitting management and outside management investing in the deal (Wright et al., 1992).

2.2 International buy-outs

2.2.1 Definition international buy-outs

In the previous section a buy-out was defined as: “Financing provided to acquire a

company. It may use a significant amount of borrowed money to meet the cost of acquisition (EVCA, 2013)”. The internationalization of private equity can be defined

as: “Both the raising of funds by private equity funds from outside the markets in

which they are headquartered and their investments into portfolio companies outside the market in which they are headquartered through a variety of entry modes,

including direct arm’s length investment and physical presence” (Wright et al., 2005,

p.147). According to this definition, a buy-out is considered international when a private equity firm raises funds, or invests outside the country where it is

headquartered. Another term used in literature to describe an international buy-out is the term cross-border buy-outs. In this paper I use the term cross-border buy-outs.

Cross-border private equity investments have experienced a rapid growth in the last two decades (Schertler & Tykvova, 2006). In the 1990s around 15% of worldwide deals had some form of foreign participation; in 2007 the number had risen to 40%. However, the intensity of cross border-border private equity activity differs per region (Aizenman & Kendall, 2008). The US stands out because most of its deals are

domestically funded whereas most other regions feature a higher level of cross-border participation. The portion of international private equity participation is especially large in Europe, where 75% of the deals are estimated to have some form of international participation (Aizenman & Kendall, 2008).

Wright et al. (20051

) attribute the growth of the international private equity market to several factors. 1) Private equity firms from the US started investing abroad, first in the UK and then in other regions such as Western Europe and later Asia.

1_{Wright
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(2005)
examine
venture
capital
but
include
later
stage
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such
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buy-‐outs
in
their}

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2) Developing countries undertook radical regulatory reforms that make them more attractive investments opportunities for foreign private equity investment funds. 3) Opportunities for cross-border investments by foreign private equity firms arose in countries with limited domestic supply; in some markets cross-border investments can outweigh domestic investments (Baygan & Freudenberg, 2000). 4) Private equity is and was an important growth engine for formerly planned economies in eastern and central Europe (Wright et al. 2005).

2.2.2 Factors that influence cross-border private equity transactions

A central assumption in the international business literature is that the knowledge required for a firm to operate in a foreign environment is different from the knowledge it needs in its own environment. As a consequence, the skills and resources of a firm may have a limited geographical application due to differences between its own and foreign countries (Meuleman & Wright, 2011). Therefore, when private equity firms invest abroad, it will require different skills and resources than they might posses (Wright et al., 2005).

Companies could benefit from cross-border transactions in several ways. A foreign investors/owner might help portfolio companies with the internationalization of their operations and develop an international perspective of their business. Their networks could expose internationalizing firms to opportunities, learning and benefits from pooling resources (Wright et al., 2005).

The cross-border activity of private equity firms is driven by a combination of factors (Guler & Guillen, 2005) some have to do with the business environment, other with cultural and geographical distance (Schertler & Tykvova, 2006).

1) Business environment. Several studies have examined the influence of institutional factors on cross-border private equity flows. Aizenman and Kendall (2008) find that the presence of high-end human capital and deeper financial markets affects the level of cross-border activity. Guler and Guillen (2005) show that the presence of

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importance of institutions is also stressed by other studies. Cao et al. (2015), examine the influence of the institutional environment on the development of international LBO markets. They examine creditor rights, which are an indicator for the strength of legal protection for creditors. LBOs appear to be more active in countries with

stronger creditor rights. Creditor rights not only influence the intensity of cross-border activity but also the type. The study finds that syndicated deals are more likely to occur in countries with weaker creditor rights. Furthermore, cross-border deals are less likely to be syndicated deals (Cao et al., 2015). Schertler and Tykvova (2006), show that cross-border private equity flows target companies with mature private equity industries.

2) Geographical and cultural proximity. Both geographical and cultural proximity are important determinants for cross-border private equity flows. The shorter the distance between the investor’s country and the country of the portfolio company, the more cross-border private equity deals are observed (Schertler & Tykvova, 2006). Private equity investors are involved in different activities when investing abroad. The activities are ranging from generating and selecting deals to acquiring,

monitoring and advising the acquired portfolio firms. The international environment poses challenges for these activities. For example, selecting deals in an international environment may be more difficult because information asymmetries might be amplified. Additionally, the monitoring and advisory activities of a private equity investor are more difficult to carry out on distance (Meuleman & Wright, 2005; Guler & Guillen, 2005). Aizenman and Kendall (2005) show that when geographical

distance is larger, the number of deals and the value of these deals are declining. According to the authors this is not surprising considering the intensive monitoring and advisory roles these investments require. Therefore, the costs of monitoring foreign investments may increase in cross-border investments.

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the ease of travel between the US and other countries. The study showed that the ease of travel between the US and other countries was positively related to the willingness of US buyers to invest in LBOs in other countries. An indicator that was examined was the Open Sky Agreements between the US and its partner countries, which eases travelling. This also positively affected the willingness of US investors to invest abroad (Chemmamur et al., 2014). Additionally, improvements in ease of travel between the target firm country and the US were followed by more successful LBO investments in those countries.

Cultural distance also influences the level of cross-border private equity flows. Cross-border private equity flows are higher when the same language is spoken in the country of the investors, and the country of the portfolio company (Schertler & Tykvova, 2006).

2.3 Syndication

Buy-out activity has grown substantially in the last decades. Especially in the period 2004-2007 buy-out activity reached a peak (Seretakis, 2014). A significant portion, 30-45%, of worldwide buy-out transactions was syndicated (Stromberg, 2008). Syndication can be described as: “A form of inter-firm alliance in which two or more

private equity firms invest in a portfolio company and share a joint pay-off” (Lerner,

1994). Meuleman et al. (2009) find that in the period from 1993 to 2006 the number of syndicated buy-out deals in the UK varied between 27% and 63%. Although syndication is often linked to venture capital, it also occurs in buy-out capital

transactions. In contrast to venture capital, syndication in buy-outs has received little attention (Wu, 2011; Meuleman & Wright, 2011). This section will explain the advantages and disadvantages of syndication.

2.3.1 Investor’s perspective Advantages

There are several reasons why private equity investors might seek to join a syndicate. Officer et al. (2009) argue that capital limitations might lead to the creation of

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if multiple investors support the bid (Officer et al., 2009). Risk diversification is an additional important motive behind syndicates, especially in large or risky deals where syndicate members are able to divide the risk (Officer et al., 2009; Chowdry & Nanda, 1996).

Information asymmetry is another possible reason for syndication. In a syndicate investors can exchange information on evaluations of investments opportunities (Casamatta & Haritchabalet, 2003). Information asymmetry is an important reason for venture capital firms to syndicate. However, it is possible that buy-out investors have different reasons to syndicate. Wu (2011) found that buy-outs firms syndicate to “address issues such as financial constraint, diversification and/or certification”. A syndicate gives investors the advantage of pooling the expertise of its members, who have diverse knowledge, expertise, reputation and practical experience (Franchini & Roisman, 2007; Brander et al., 2002). Brander et al. (2002), show that syndicated deals in venture capital generate, on average, higher rates of return in comparison with stand-alone projects. This indicates that syndicates are able to add more value to a portfolio firm in comparison to an individual investor. However, this phenomenon has not yet been researched for the buy-out industry. Syndicates also allow members to penetrate foreign markets, which might otherwise be closed to them due to foreign restrictions or limitations. Finally, foreign investors might prefer to syndicate with local investors because it is too costly to compete with better-informed local investors

Disadvantages

Private equity investors might be cautious about forming a syndicate because they must share in the upside return of the investment, which reduces their individual return. Hence, syndication is costly, as the investor has to forgo a part of its profits. Furthermore, the cost increases because investors might concentrate less effort in a syndicate because ownership is shared amongst the investors (Casamatta &

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2.3.2 Portfolio company perspective Advantages

From a seller’s perspective a syndicated deal might be beneficial. The seller’s goal is to receive the highest value for their asset. Since syndicates have multiple sources of funding, expertise and experience they are often able to assess and provide fair value. Syndicates also increase the number of potential investors by including investors which would otherwise not have been able to enter the transaction, whether due to transaction size, lack of adequate funding, need for a strategic partner or desire to share risk (Franchini & Roisman, 2007).

Disadvantages

There are several disadvantages to syndicates from a seller’s perspective. One of the concerns of sellers is that investors could collude in a syndicate in order to decrease prices by limiting the number of competing bidders in an auction for a takeover target (Officer et al., 2009). Another concern might be the so-called bid jumping of

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2.3.3 Cross-border syndication

A cross-border syndicate consists of investors from different countries that jointly invest in a portfolio company (Meuleman & Wright, 2011) with an investor in a foreign country, and another investor located in the same company as the portfolio company. The reasons for investors to form a cross-border syndicate are similar to those of a normal syndicate. Information asymmetry problems might be amplified in an international context due to geographical and institutional differences between countries (Wright et al., 2005). Foreign investors might work together with local investors to overcome these problems. A reason why foreign investors might syndicate deals with local investors could therefore be to gain knowledge of the institutional environment (Bruton et al., 2005).

Furthermore, cross-border syndicates could reduce transaction costs for foreign investors when they delegate the monitoring of their portfolio companies to local partners who have more knowledge on the local corporate culture, legal environment, industry structure and technological conditions (Tykvova & Schertler, 2008;

Meuleman & Wright, 2011). Cross-border syndicates may also combine more

complementary skills and abilities than purely domestic syndicates. For example, they might have a key role in the internationalization efforts of the portfolio company. (Tykvova & Schertler, 2008)

Institutional differences between countries seem to be an important reason for investors to syndicate in border deals. Furthermore, the likelihood that a cross-border deal is syndicated is reduced when the number of investments banks in the country of the investment is higher. The need to syndicate in cross-border transactions decreases over time as foreign investors learn, which can reduce institutional barriers. (Meuleman & Wright, 2011).

3. Methodology

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3.1 Dataset

In this study I examine the share of foreign investors in LBO transactions on the Dutch buy-out market in the period 1997 to 2013. For this research, data on buy-out investments in The Netherlands are gathered from the Zephyr database (Bureau van Dijk). Zephyr is a database containing worldwide merger and acquisition information and has a section on private equity transactions. Data was collected on buy-out transactions in The Netherlands for the period 1997-2013. The initial Zephyr dataset includes 1068 buy-out transactions and contains information on transaction values, date of completion, country origin of investors, industry of portfolio companies and the number of investors involved in the transaction. The portfolio companies involved in these transactions are located in The Netherlands. Therefore the activity of Dutch investors abroad is not included.

The initial sample consists of 1068 transactions of the buy-outs types: LBO, MBO, MBI and MBI/MBO. There were only a few MBI and MBI/MBO transactions and these were removed from the sample. The sample consisted of 437 MBO transactions. These were removed for two reasons: 1) Cross-border investments only occur in 2% of total MBO transactions. 2) In MBO transactions the management of the company conducts the transactions, in some cases sponsored by a private equity firm. The database did not include the sponsoring private equity firms for a number of MBO transactions. See appendix B for a comparison of MBO and LBO transactions in The Netherlands.

After the removal of transactions that did not qualify as LBO transactions, a dataset of 538 LBO transactions remains (see appendix C). Only 162 of these transactions have a known deal value. Therefore I use two data samples: (1) the general sample

including all 538 transactions, (2) and a sub-sample of 162 transactions. Zephyr places the transactions in the year that these were completed.

3.2 Sample

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foreign and cross-border investors account for 32% and 4% of the deals. These

percentages are different in the sub-sample. In the sub-sample 33% of the transactions are from local investors, and 59% from foreign investors. Therefore, the coverage of foreign investors in the sub-sample is higher in comparison to local investors. The group local and foreign investors primarily consist of single investors (87% and 82%).

Table 3.1: Characteristics sample 1997-2013 (value in millions)

Total Only Local Only Foreign Cross-‐ border Absolute 538 343 171 24 Total LBO investments As % 100% 64% 32% 4% Single investor As % 87% 82% 0% Syndicate As % 13% 18% 100% Sub-‐sample Absolute 162 53 95 14 As % 100% 33% 59% 9%

Table 3.2 shows the descriptive statistics of the value of transactions in the sub- sample. The table shows that the range between transaction values in the Zephyr database is relative large. The average of the data in the sub-sample is larger than the median. This is caused by a number of relative large transactions in the data set. One of the difficulties in examining private equity activity is data limitation. Private companies and private equity investors have lower reporting standards in comparison to public companies. Therefore, there is not a single database with transaction

information containing complete information on all variables of the transactions. This

research uses the Zehpyr database2

. The “Nederlandse Vereniging voor

Participatiemaatschappijen” (NVP) has a database containing information on private equity activity, including buy-outs. The NVP database consists of private equity transactions conducted in The Netherlands since the 1980s. Table 3.2 shows the descriptive statistics of transaction values of the Zephyr and NVP database. The table

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shows that both databases include the same maximum transaction value. However, there are differences in median, total, average and minimum values. The two datasets are different in the number of transactions and the number of transactions with known deal values. Furthermore, the sample of the NVP consists of more transactions in the total sample.

Table 3.2: Statistical comparison of transaction values Zephyr and NVP (value in millions)

Zephyr NVP

Total sample (N) 538 721

Sub-‐sample (N) Sub sample percentage

162 30% 98 14% Total value € 82.445,3 € 30.290,0 Minimum value € 0,6 € 0,1 Average value € 508,9 €272.8 Median value € 187,5 € 54,0 Maximum value € 8.700,0 € 8.700,0

There are several explanations for the differences between the Zephyr and NVP datasets. The NVP does not label every buyout transactions with a sub-label of leveraged, management buy-out, management buy-in or management buy-in/buy-out. Therefore it is possible that the sample of the NVP includes more than only leveraged buyouts, which could explain the difference in the number of transactions included in the database. The difference in deal values might be explained by the fact that a number of transactions in Zephyr have an assumed deal value. These are based on public resources. It is possible that the NVP does not include these transaction values. Furthermore, the NVP publishes annual reports on private equity activity in The Netherlands. In these reports local and a select group of foreign investors are taken into account. A group of large transactions of foreign investors are not included in these reports (NVP, 2006). It is possible that these transactions are also not included in the dataset of the NVP.

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NVP database labels most transactions as “buy-outs”. Therefore it is not possible to differentiate in transaction types to the same extent in the NVP database as in the Zephyr database.

3.3 Approach

I examine three aspects of cross-border buyouts in The Netherlands: 1) how foreign investors choose to invest (single, foreign syndicated or cross-border syndicated), 2) where foreign investors originate, and 3) in what industries foreign investors invest in. For each of these three aspects I examine two variables: 1) the number of LBO

transactions, and 2) the value of LBO transactions. I use two data-samples to measure these two variables. The first sample consists of 538 transactions and is used to analyse the number of transactions. I use a sub-sample of 162 transactions to measure the value of transactions.

I examine whether transactions values differs across different group of investors. The data on the value of transactions is interval data. I tested whether the data is normally distributed with a Jarque Bera test. The p-value of the Jarque Bera test is 0,000, which indicates that the data is not normally distributed. Therefore, in order to test whether differences across groups of investors are significant I use the Wilcoxon Rank Sum test. I test with an Alpha of 5% on all tests (Keller, 2012)

The structure of my approach is illustrated in figure 3.1

Figure 3.1: Structure of approach

Cross-‐border buy-‐ outs Type (single, syndicate, cross-‐ border syndicate Number of transactions Value of transactions

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3.4 The Dutch LBO market

There are two approaches to measure the size of the Dutch LBO market; the industry and market approach (Baygan & Freudenberg, 2000). The industry approach

measures the investments made by private equity firms located in a given country, while the market approach measures all the investments made in a country. As a consequence, the industry approach includes the investments made by private equity funds located outside the given country. In this section I establish the size of the Dutch LBO market based on the sample obtained from Zephyr described in the previous section. The industry perspective includes the activity of local investors on the Dutch LBO market. The activity of these investors abroad is not included. The market perspective includes the activity of local and foreign investors in The Netherlands.

The size of the Dutch LBO market is illustrated from both perspectives in figure 3.1 and 3.2 over the period 1997 until 2013. Comparing the market perspective in figure 3.2 to the industry perspective in figure 3.1 shows with the inclusion of foreign investors the total number of deals increases. During the period 1997-2013 two crises occurred, the burst of the dot.com bubble (2000) and the financial crisis (2007-2008). Figures 3.1 and 3.2 show a decrease in the number of investments shortly after the two crisis periods. The financial crisis in 2007-2008 seems to have had a stronger impact on the size of the Dutch LBO market in comparison to the burst of the dot.com in 2000 in the market perspective.

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Figure 3.1 Industry perspective

Figure 3.2 Market perspective

The importance of foreign investors on the Dutch LBO market is stressed by figure 3.3 and 3.4. The size of the Dutch LBO market is shown in terms of total deal value. The first element that draws attention is the large difference in total value between figure 3.3 and 3.4. This shows that with the inclusion of foreign investors the size of the Dutch LBO market is substantially higher. In terms of number of investments the year 2007 has the highest number of investments, while in terms of total value the year 2006 has the highest values. This is surprising because generally 2007 is regarded as the height of the LBO market in the US and Europe (Seretakis, 2014). This raises the question whether investments had a higher value in 2006, or whether a few transactions caused a peak in 2006. The figures make clear that foreign investors are accountable for a significant amount of LBO investments on the Dutch LBO market. What group of foreign investors are active on the Dutch market, and where do these foreign investors originate? I will address these issues in the next section and

0 10 20 30 40 50

Number of transactions

0 20 40 60 80

Number of transactions

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present an analysis on the development of the share of foreign investors in The Netherlands.

3.3: Industry perspective (value in million)

3.4 Market perspective (value in million)

4. Results

In the previous chapter I provided an overview of the Dutch LBO market from the industry and market perspectives. The differences between these perspectives stressed the substantial presence of foreign investors on the Dutch LBO market. In this section I further analyse this presence and show how it has developed in the period 1997-2013. I first show the composition of the entire Dutch LBO market before

concentrating on the share of foreign investors. Then I continue with the origin of foreign investors and conclude with the industries foreign investors invest in.

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4.1 Composition of the Dutch LBO market

The Dutch LBO market can be divided in three groups of investors, illustrated in figure 4.1. The first group consists of the local investors, who invest singly or in local syndicates. The second group are the foreign investors, either single foreign investors or foreign syndicates. The third group are the cross-border syndicates, which are cooperation’s between foreign and local investors. Together these three groups account for the activity on the Dutch LBO market.

Figure 4.1: Investors in the Dutch LBO market

The findings of this dataset are presented in table 4.1, which illustrates the share of each group of investors on the Dutch LBO market. A total of 538 transactions are analysed during the period 1997 to 2013. In this period foreign investors conduct 32% of the LBO transactions and account for 62% of the total deal value. As a

consequence, the average deal value of foreign investors is substantially higher in comparison to local investors, who are responsible for 64% of the deals, but for only 7% of the total deal value. The influence of the third group, cross-border investments, stands out for its low contribution in number of deals (4%), but its high contribution towards total deal value (31%). Subsequently, cross-border investments have the highest average deal value of the three listed groups. Table 4.1 sheds more light on the presence of foreign investors on the Dutch LBO market, especially in terms of deal values. It becomes clear that deals involving foreign investors have a

substantially higher deal value in comparison to deals with local investors. The element that stands out is the size of cross-border investments.

Dutch buy-‐ out market Local (NL) investors Single local investor Local syndicate Foreign investor Single foreign investor Foreign syndicate Cross-‐border

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I tested whether the differences between these groups were significant. The Wilcoxon Rank Sum test indicates that the transaction values of the three groups of investors on table 4.1 are significantly different. Local LBO investments are significantly different from foreign LBO investments and cross-border syndicated investments (p-values 0,000). Additionally, foreign LBO transactions are different from cross-border syndicated investments (p-value 0,000).

Table 4.1: Composition Dutch LBO market (value in millions)

Total LBO market Local LBO investments3 Foreign LBO investments Cross-border syndicated investments4

Number of deals Absolute 538 343 171 24

Relative 100% 64% 32% 4%

Total value of deals Absolute € 82.445,3 € 5.561,3 € 51.264,7 € 25.619,3

Relative 100% 7% 62% 31%

Average value of deals

Absolute € 508,9 € 104,9 € 539,6 € 1.829,9

Table 4.2 provides more information on the number of investors involved in cross-border syndicated investments (see appendix D). The majority of cross-cross-border investments involve transactions of two investors; in this case a local (Dutch) and a foreign investor. The average value of deals with two investors is higher in

comparison to the group foreign LBO investments, however, substantially lower in comparison to the average deal value of the entire group of cross-border deals shown in table 4.1. The relative high average value of cross-border deals is caused by two very large transactions, realized by a syndicate of five and six investors. These two transactions alone account for 19% of the total deal value in the entire period 1997 to 2013. Both of these two transactions occur in 2006 and are a major contributor to the high transactions values illustrated in figure 3.4. These transactions, with a combined value of roughly 15 billion also explain why the Dutch buy-out market reached its height in 2006. Without these two transactions the value of LBO transactions in The Netherlands has its height in 2007, instead of 2006. This would be in line with the international developments on the LBO market (Seretakis, 2014).

3_{See
appendix
D
for
the
development
of
local
investors}

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Table 4.2: Deal information Cross-border investments (value in millions)

Number of investors Number of deals Average value of deals

#2 17 € 690,7

#3 4 € 1.351,3

#4 1 n.a.

#5 1 € 6.648,3

#6 1 € 8.700,0

Table 4.1 illustrates that foreign investors have a strong presence on the Dutch LBO market and shows that foreign investors are accountable for the larger deals. In this section I show how the presence of foreign investors has developed over time. In the period 1997-2013 two crises occurred: the burst of the dot.com bubble in 2000 and the financial crisis in 2007-2008. How did these affect the presence of foreign investors?

Figure 4.2 depicts the relative development of the number of transactions conducted by the three groups of investors over the period 1997 to 2013. The line shows the absolute number of total transactions over the years. The figure illustrates that LBO investments by the groups foreign investors and cross-border investors was at it lowest point in 2001, with 13% of the total share of the LBO market. At its highest point foreign investors accounted for 52% of the LBO market in 2003.

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Figure 4.2: Development composition LBO market in terms of number of deals (right axis displays total number of transactions per year)

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Figure 4.3: Development composition LBO markets in terms of value (right axis displays total deal value) (values in millions)

4.2: Composition cross-border investors

The previous section showed the presence of cross-border investors on the Dutch LBO market. The group of foreign investors can be further divided in two groups: the single foreign investors and the group foreign syndicates. Cross-border syndicates are the third group with participation of foreign investors. These are collaboration

between foreign and local investors. In the remainder of this chapter the analysis will focus on these three groups, illustrated in figure 4.4.

Figure 4.4: Sub groups of foreign investors in the Dutch LBO market

Table 4.3 presents deal information of the three groups of investors involving foreign investors. Single foreign investors account for the majority of foreign investments and the average deal value of these deals is higher in comparison to the average deal value of local investors presented in table 4.1. There is not a large difference in the number

Dutch buy-‐ out market Local (NL) investors Single local investor Local syndicate Foreign investor Single foreign investor Foreign syndicate Cross-‐border

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of foreign investors involved in foreign syndicates and involved in cross-border syndicates. However, there is a large disparity in the average deal value of the two types of syndicates. Additionally, cross-border syndicates have on average more investors in comparison to foreign syndicates.

The Wilcoxon Rank Sum test shows that the differences between the group single foreign investors is significantly different from foreign syndicate (p value 0,003) and border syndicates (p value 0,001). The group’s foreign syndicate and cross-border syndicate do not differ significantly from each other (p value 0,363). Although the average transactions value of cross-border syndicated investments is substantially higher than foreign syndicated investments, this difference is not significant. This is caused by the variance of the observed transactions values in the sample.

Table 4.3: Deal details foreign investments (value in millions)

Single foreign investors Foreign syndicate investors Cross-border syndicate investors Deal distribution Absolute 141 30 24 % 72% 15% 12%

Deal size Average deal size € 461,7 € 814,4 € 1.829,9

Number of investors

Number of investors involved

141 67 61

Average # of investors per syndicate

1 2,2 2,5

Figure 4.5 sheds light on the relative development of different groups of foreign investors over time in terms of number of transactions. The line “total number of transactions” indicates the total number of transactions conducted by foreign

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deals might have a higher risk profile and investors might be unwilling, or unable to take these risks in economic uncertain times.

Figure 4.5: Composition LBO transactions foreign investors in terms of number of deals (right axis displays total number of foreign investments)

Figure 4.6 shows the relative development of foreign investments in terms of total deal value. This graph depicts a similar trend as graph 4.5. Before the two crisis periods there are more syndicates formed by foreign investors. During the burst of the dot.com bubble and the financial crisis in 2008 the total deal value is almost solely accounted by single foreign investors. Furthermore, the value of cross-border

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Figure 4.6: Composition foreign investors in terms of total value (right axis displays total deal value) (values in millions)

4.3 Origin of Cross-border investors

The previous sections established that foreign investors have a strong presence on the Dutch LBO market. This raises several questions, such as whether upcoming

economies are investing in the Netherlands or are the foreign investors primarily made up of neighbouring European countries? Furthermore, it is not clear how different groups of foreign investors reacted to the two crisis periods. This section addresses these issues by examining the origin of foreign investors on the Dutch LBO market, and their composition in the period 1997 to 2013.

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US investors have the highest involvement in cross-border syndicates. A possible explanation is the geographical distance between the US and The Netherlands. US investors might use cross-border syndicates to diversify risks or make use of local networks. Other countries with high participation in cross-border syndicates are Belgium and Germany. In general, the continental European countries have a higher percentage of foreign syndicated investments.

Table 4.4 the origin of foreign investors in numbers of transactions

Country of LBO investor Total number of transactions Single foreign Foreign syndicate Cross-border syndicate United Kingdom (UK) 92 61% 28% 11% USA (US) 76 54% 25% 21% Belgium (BE) 21 57% 24% 19% Germany (DE) 11 45% 36% 18% France (FR) 10 60% 30% 10% Luxembourg (LU) 6 33% 67% Other Europe 21 62% 24% 14% Other non-Europe 6 83% 17%

The previous table illustrates that the majority of foreign investors originate from the UK, the US and Europe. A small portion of investors originates from other non-European countries. Figure 4.7 highlights the shares of these groups over time. This figure includes all the foreign investors involved in single foreign, foreign syndicated and cross-border syndicated deals. The line “total number of transactions” illustrates the total number of transactions of these three groups combined.

The figure shows that during or shortly after the burst of the dot.com bubble, and the financial crisis, the activity of US investors declines substantially (2001 and 2008). However, after both periods the activity of US investors starts to increase again. In 2013, US investors account for more than 50% of all foreign investors. While the activity of US investors decreases during the crisis periods, UK investors account for a larger portion of the foreign investments in these periods (2001 and 2008).

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non-European investors have a relative small presence on the Dutch LBO market. In 2009 and 2010 the presence of non-European investors is stronger, but this is not sustained in the following years. Finally, the group European investors has a strong presence, although their numbers seem be declining over the entire period 1997 to 2013.

Figure 4.7: Development origin of foreign investors in number of deals (right axis displays total number of deals by foreign investors)

Table 4.5 presents information on the transactions values of single foreign investors. The table shows that the majority of single foreign investors originate from UK and the US. The average value of US investors is highest, followed by UK investors. European investors have a lower average value, which is closer to the average value of local investors in The Netherlands, presented in table 4.1.

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Table 4.5: Transactions information single foreign investors

Country Number of transactions Average value of transactions UK 38 € 473,6 US 21 € 694,5 Europe 12 € 124,5 Non Europe 3 € 28,2

Tables 4.6 and 4.7 presents more detailed information on the investor’s origin in foreign syndicates. The majority of foreign syndicates are made up of investors from different foreign countries, and could also be described as mixed foreign syndicates (Table 4.6). Table 4.7 shows that investors from the US and the UK account for the majority of mixed foreign syndicates. This is not surprising considering the fact that these two countries have the most developed buy-out markets, and strong institutional ties such as a common language and similar legal systems. It is possible that US investors syndicate with investors from the UK to reduce investments risk and make use of the networks of UK investors, who are more familiar with the European environment. A smaller amount of investors consists of investors from The UK and other European countries, which can be explained by the geographical proximity of investors in Europe. Finally, a small amount of cross-border deals consists of US and European investors, or European and European investors.

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4.4 Industries portfolio companies cross-border investors

The focus of the previous section was on the size and development of the different groups of foreign investors on the Dutch LBO market. The size of the market was described in table 4.1 and the composition of foreign investors was illustrated in table 4.3. This section further analyses the industry recipients of LBO investments from foreign investors. First I will provide an overview of the different industries that were involved in LBO transactions with foreign investors. Secondly, I show these foreign investments by type of foreign investor (single foreign, foreign syndicate and cross-border syndicate). The industries of the portfolio company are based on the Zephyr classification.

Figure 4.8 shows the composition of industries that received foreign investments by single foreign investors, foreign syndicates and cross-border syndicates, in terms of the number of investments made in each industry. The figure illustrates that four industries make up close to 75% of the total number of investments made in the Dutch market. This suggests that foreign investors are mainly interested in companies from a small number of industries. The industry “Other Services” is the most popular

industry and consists of companies in industries such as ICT, business services and media. In the following figures I show the development of these four industries over time.

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Figure 4.9 illustrates the relative development of the number of deals in the four main industries conducted by foreign investors (single foreign, foreign syndicates and cross-border syndicates). The line “total” shows the total number of investments in these four industries combined. The industry “Other services” accounts for a large portion of the deals in the period 1997 to 2000, 2003 to 2007 and 2011 to 2013. During both crisis periods the investments in the industry “Other services” declines. This industry consists of high-tech companies in ICT, or in other types of companies in business services and media. Shortly after the two crisis periods, the share of investments in the industries “Machinery” and “Wholesale” increases. A reason for this development could be that foreign investors prefer mature industries with stable cash flows in crisis periods.

Figure 4.9: Development industries portfolio companies in terms of number of deals (right axis displays total number of deals in these four industries)

Figure 4.10 shows the relative development of the four industries in terms of total deal value. The line “total” illustrates the total value of the transactions in these four industries. The figure shows that “Other services” accounts for a large portion of total deal value in the years 1999 to 2000, 2006-2007 and 2011-2012.

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Figure 4.10: Development industries portfolio companies in terms of deal value (right axis displays total deal value invested in these four industries in millions)

Table 4.8 presents the investments in the four main industries divided by investor group. The table shows that single foreign investors account for the majority of investments in all four industries. However, in the industry “Other services”, the group foreign syndicates and cross-border syndicates account for higher transaction values. The table suggests that single foreign investors are investing in more mature industries such as “Wholesale and retail trade”, “Machinery” and Chemicals”, while syndicates account for the majority of investments in the industry “Other services”.

I tested whether these four industries differed significantly in terms of the amounts invested. The Wilcoxon Rank Sum tests indicated that there are no significant differences between the four industries (see appendix F).

Table 4.8: Investments in industries by foreign investors (value in millions)

Single foreign investors Foreign syndicates Cross-‐ border syndicates Wholesale & retail trade

Relative number of

investments 82% 4% 14% Total value of

investments € 7.437,3 n.a. € 1.861,9

Other services

Number of

investments € 7.585,9 € 9.895,1 € 15.796,2

Machinery, equipment, furniture,

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Total value of

investments € 2.710,7 n.a. € 6.648,3

Chemicals, rubber, plastics, non-‐ metallic products

Number of

investments € 8.846,2 n.a. € 832,0

4.5 Summary of results

In this chapter I showed the presence of different groups of investors on the Dutch LBO market. Then I continued with showing the size and development of cross-border investments, the origin of foreign investors and the industries of portfolio companies. The main results of this chapter are summarized in table 4.9.

Table 4.9: Summary of results

Aspects LBO market Main results

1) Size Dutch LBO market

I find that foreign investors have a significant presence on the Dutch LBO market, 32% in terms of number of buy-out transactions and 62% in terms of total deal value. Cross-border syndicates account for 4% of the number of transactions and 31% of the total deal value. Therefore the total and average deal value of buy-out transactions involving foreign investors is substantially higher in comparison to local investors. Shortly after crisis periods the number of buy-outs involving foreign investors decreases to 18% of total investments in 2008 from 38% in 2007. The transaction value of foreign investors also decreases. In 2007 this is 69% of total investments and in 2008 92%. In 2009 it reduces to 18% but recovers to 90% of total value in 2010.

2) Composition of foreign investors

The majority of foreign investors invest singly (72%), 15% of foreign buy-outs are foreign syndicates. 12% of foreign transactions are cross-border syndicates. The average deal value of foreign- and cross-border syndicates is substantially higher than those of foreign investors. During crisis periods the investments by both foreign syndicates and cross-border syndicates decreases. Cross-border investments account for a substantial portion of the total amount invested. However, cross-border syndicated investments only have substantial deal value in five of the seventeen years in the sample. 3) Origin of foreign

investors

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During crisis periods the number of US investors decreases strongly, but recovers in the following years.

4) Industries of portfolio companies cross-border investors

The majority of foreign buy-out investment concentrates on companies in four industries. The most popular industry is other services, which consist of companies in ICT, business services and media. After the two crisis periods in 2001 and 2008, the number of investments in other services decreases. The value also decreases except for 2009. The results suggest that foreign- and cross-border syndicates are mainly investing in the industry other services, while single local investors are also investing in other more mature industries.

5. Discussion

I examined the development of cross-border LBO investments in The Netherlands during the period 1997 to 2013. In the previous chapters, I discussed the construction of the dataset and showed the results of cross-border buy-out investments in The Netherlands. In this chapter I discuss these results and place them in a broader perspective by using previous literature.

5.1 The Dutch LBO market

5.1.1 Size of the Dutch LBO market

In this study I estimate the size of the Dutch LBO market based on a dataset from Zephyr. There are two possible perspectives to measure the LBO activity in the Dutch LBO market: the industry perspective and the market perspective. I showed that with the inclusion of foreign investors in the market perspective, the Dutch LBO market is significantly larger than when just examining the activity of Dutch investors included in the industry perspective.

The size of the Dutch LBO market strongly depends on the dataset used and the transactions that are included. The European Venture Capital and Private Equity Association (EVCA) annually publishes information on private equity activity in Europe. According to their data, the size of the Dutch LBO market is significantly smaller in comparison to the estimates in this study. Figure 5.1 illustrates the value of buy-outs from the industry and market perspective based on the EVCA data.

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significant disparity in the size of the market. The total deal value of the Dutch market estimated by the EVCA is substantially lower in comparison to the figures in this study. The numbers of the EVCA estimate the size of the Dutch market to have a peak of 4 million in 2007. This is substantially lower in comparison to my estimates in chapter 3.

Figure 5.1: Development buy-out market Industry and Market perspective

Source Own calculations based on EVCA statistics (2014)

In another study, Cao et al. (2015) examine worldwide LBO activity with a dataset of 2589 LBO transactions in the period 1995 to 2007. 82 of these transactions occurred in The Netherlands. The average value of these transactions was €974,2 million. 45% of these transactions were cross-border deals. In this study all deals with a

transactions value below 5 million were excluded.

The fact that the estimation of the Dutch LBO market in this study differs from other studies can be caused by several factors. The EVCA bases it data on national private equity organisations. The Dutch private equity association (NVP) does not include all foreign investors, as previously mentioned in chapter 3. In their measurements, The NVP excludes the activity of large foreign investors that do not have independently operating offices in The Netherlands (NVP, 2007). As a consequence some of the largest LBO transactions are excluded. Therefore the EVCA seems to include only a small portion of foreign investors. As I have shown in this study, a significant portion of buy-outs involves a foreign investor. Since the EVCA bases their studies on the NVP data, differences occur.

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5.1.2 Development of the Dutch LBO market

This study shows the development of cross-border LBOs in The Netherlands during the period 1997-2013. The results show that there was a substantial growth in the period 1997-2007, with a decline in 2001 and 2002. In 2006 the peak of LBO activity was reached in terms of value of transactions. 2007 marked a peak in number of transactions. In 2008 and 2009 cross-border LBO activity decreased significantly as a consequence of the financial crisis.

The trend in the Dutch buy-out industry follows a similar trend to the growth of the worldwide buy-out deal value. Figure 5.2 illustrates the global deal value of buy-outs worldwide in the period 1995 to 2009. In this period, the value of worldwide buy-out value increases in the period 1995 to 2007 despite a slight decline in 2001. In 2008, and especially 2009, buy-out values decrease strongly, similar to the trend in The Netherlands. The figure shows that the US and Europe account for the majority of buy-outs deals in this period.

Figure 5.2: Worldwide buy-out deal value

Source: Bain, 2010

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the availability of debt decreased strongly. In the same period LBO activity in The Netherlands, and worldwide decreased substantially.

Figure 5.3: Debt financing for LBOs

Source: Bain, 2010

5.2: Share of cross-border investors on the Dutch LBO market 5.2.1 Cross-border investments

The results presented in previous chapters show that foreign investors have a strong presence on the Dutch buy-out market. Over the total sample period, foreign investors account for 32% of the transactions and 62% of the total transactions value. The average value of these investments was €539,6 million. The number of cross-border syndicated investments was smaller. These investments accounted for 4% of the number of transactions, but for 31% of the total transaction value in this period. The average value of these investments was €1.830 million, mainly caused by two very large cross-border syndicated transactions. The share of foreign investors on the Dutch LBO market in the period 1997 to 2013 ranges from 13% to 52% of the total LBO market in terms of number of deals. In terms of total deal value, the contribution of foreign investors ranges between 18% and 99%.

Development of cross-border buy-outs in The Netherlands from 1997 to 2013