Asset Financials: the merger of A&F and Economics
31 May, 2016
Private equity leads to loss of authority (dilution of control) for existing boards of private companies. Public equity is more sensitive for information asymmetry, the cost of equity is therefore higher, resulting in a less attractive choice for private companies. This is because, managers who lose control when private equity enters, are more likely to opt for capital in the form of a bank loan rather than private equity. How do you get businesses to become interested in private equity and what role does the NVP has in bringing the businesses and private equity together?
The management ultimately chooses for whether to engage with a private equity firm or not. They know that in exchange for capital, the private equity firm asks shares and thus control. If they don’t accept this, they should choose another form of capital, such as debt. Moreover, in public equity also, the board and management have to deal with the shareholders. Besides capital, private equity firms bring knowledge and experience to the table. This is also beneficial for companies. A private equity firm is in fact a shareholder. Most private equity firms are specialized in a certain sector and have a large network and great knowledge of that sector. We always say that an entrepreneur or company should go for the type of investor that suits them best. The NVP receives many questions from the entrepreneurs about private equity firms. We try to answer these questions as much as possible, by referring to the relevant parties.
Banks impose ‘too’ strict requirements because of which very few loans are available. What is your opinion on this situation and how do you expect private equity funds to take over the function of providing capital from banks?
We see stricter liquidity requirements, for example, Basel 2 Act. However, banks deny that they provide less capital. Banks even say that this percentage is the same as before the crisis and still growing. I personally believe that entrepreneurs with a good business plan still get funding from the banks, only the market requirements are stricter. Private equity firms will never take over the role of banks, as equity is a different form of capital than debt. Nowadays, entrepreneurs often consider many different forms of finance, like crowdfunding and thus also private equity. 90% of the total number of investments made by private equity firms is in the SME sector. In other words, the sector is becoming increasingly socially relevant. We also see that banks are more eager to provide debt to companies that have a private equity firm as shareholder.
Corporate Governance codes and codes of conduct are becoming more and more important. Due to all accountancy scandals over the years, transparency and integrity are seen as core business. Does this also apply to the private equity sector?
Transparency and integrity are crucial in the private equity sector. Reputation and trust are extremely important in the sector and is created by being transparent and honest towards both the investors and the portfolio companies. However, it remains a private sector. This means transparency towards the direct stakeholders is large, but there is no such need to be fully transparent towards the market. Besides, since 1984 we have a code of conduct. It renewed in 2008 and we are updating it even further. Furthermore, this code of conduct is linked to the Invest Europe’s code of conduct. Large private equity firms are in addition required to be AFM licensed. The difference in transparency to the general public between public and private equity is well explained by the different owners. At a publicly traded company, the public who owns the shares are the owners. To reach its shareholders, listed companies must disclose a lot of information to the general public. The stakeholders of private equity companies are a relatively small group of private investors. Those investors are very well kept up to date by the private equity firms and often better informed than the public in a listed company, but there is no need to make that information public. The goal: “informing the investors” is accomplished.
What is your ambition/vision about the role of private equity in the Netherlands in the future?
There are approximately 1450 companies that have a private equity firm as a shareholder, where about 350,000 people work with a turnover of €85 billion. My ambition is that people recognize the role of private equity and are more positive about it. A lot of beautiful things happen in the sector. Start-ups that are given a chance, successful companies that are getting an extra boost and subsidiaries that sometimes become larger than the parent company itself, like NXP. In Europe, the opinion about private equity is much more positive, for example, with the Capital Markets Union. There is a very important role for the sector. I believe that private equity is becoming more important in the financing of SMEs and start ups.
What advice would you like to give to future finance and accounting students of Tilburg University?
I think that students should do more than just studying. For example, make sure that you develop yourself next to your study and create your own network. Becoming active in study associations contributes a lot to your personal development. You will gain a lot of skills which will help you in your future career. In addition, an experience abroad is also very useful. These are all clichés, but of course you have to develop yourself broader. In this way, you meet a lot of new people than just the people next to you in class. So broadening your knowledge and views is extremely important. In the end, it does not matter what you study as long as you do it with passion.
