Societal challenges and lower valuations create opportunities for private equity

Last modified: 07 April 2024 09:33
With upcoming elections in 2024, the BVA plans to engage policymakers and clarify the role of private equity.

With elections approaching, the Belgian Venture Capital & Private Equity Association (BVA)’s efforts include engaging policymakers to explain the industry’s positive impact on society as innovation booster and creator of growth and jobs. A conversation with Secretary general Jan Alexander.

Jan Alexander has been Secretary general of the Belgian Venture Capital & Private Equity Association (BVA) for two years now. Before that he was Head of PMV Fund Investments, the Fund of Funds activity of Participatiemaatschappij Vlaanderen (PMV). He was also an advisor for the Belgian Growth Fund. Throughout his career, he has gained deep insight into the Belgian investor community and he has built a vast network of professionals within the private equity (PE) and venture capital (VC) space.

Sharper portfolio choices required
The BVA has 200 members, ranging from the smallest VC funds to the very large listed private equity firms like Gimv or Ackermans & van Haaren. 2023 was quite a tough year for the sector, according to the BVA. “Investment volumes have fallen back to 2018-2019 levels”, says Alexander. “2021 was truly a record year in many countries. In Belgium we had 4 billion euros in PE investments. Last year this was 1.5 billion, so that has fallen considerably. Fundraising has fallen by 35 percent and the deal value of buyouts has almost halved. Valuations have fallen as well, but that may be a good thing. Fewer exits have been made, which is weighing on the sector. This means that there are fewer distributions and it also means that fundraising becomes more difficult. Limited partners (LPs) are less likely to participate in a new fund if the previous fund has not made any distribution yet.”

For venture capitalists specifically, the decline in valuations may have been even stronger. “It might be necessary for them to deploy available capital, especially for companies in need of cash”, says Alexander. “This requires raising capital in a more difficult climate compared to three years ago. Venture capitalists may need to make quicker decisions regarding portfolio companies, prioritizing support for some while parting ways with others due to the scarcity of cash, leading to sharper choices overall.”

‘Low is the new up’
Jan Alexander discusses various factors that influence the private equity market. He notes that the interest rate environment and the availability of capital have a major impact on buyouts. In previous years, with a near-zero cost of capital, fundraising was smooth, but possibly too smooth, resulting in a surplus of capital. However, unlike after the financial crisis when investing resumed quickly, investors remained cautious during 2023 due to high valuations. Now this seems to be changing, especially in the US, where some companies are filing for IPO at lower valuations, indicating that ‘low is the new up’. This suggests a shift towards more realistic valuations and renewed activity in M&A. “50 percent of our investors’ portfolio companies have been in the portfolio for 4 years or more”, says Alexander. “That creates a certain pressure on those teams to adjust valuation expectations when contemplating a new round or an exit.”

There are alternatives for holding investments in a portfolio for longer. Alexander mentions ‘continuation funds’, in which the holding is transferred to a new vehicle, giving investors the choice to go along or be bought out. This preserves value for funds and provides liquidity for LPs. Another option is to sell at a lower price than initially expected. He also mentions an IPO as an option, although this remains a limited segment in Belgium, but it can certainly generate liquidity.

ESG and diversity are more relevant than ever for the PE sector
The BVA’s focus for 2024 is on ‘the usual’ activities, says Alexander, meaning networking, education and public engagement. The BVA will organize workshops on various topics relevant to private equity, such as ESG, fiscal matters, debt markets, and IPOs. The association also plans to launch four new academies for young professionals to provide further education and networking opportunities for members, focusing on venture capital and private equity.

A very significant topic for the sector is ESG (Environmental, Social, and Governance). “It really became top of mind in PE land”, says Alexander. “In the past, sustainability was more of an obligation, it was in the risk corner. Today this is very much part of the core business of many investors.”

The BVA is responding to this by regularly conducting research, including a recent survey on diversity and inclusion within teams. “Gender diversity remains a challenge for the sector in terms of attracting and retaining female professionals”, according to Alexander. “To further promote diversity we’ve included a Diversity and Inclusion Roundtable within the association. We also organize workshops on various other ESG-related topics, aiming for standardization in reporting and addressing issues like decarbonization, compensation linked to ESG performance, and its impact on company valuation.”

Engaging policymakers in election year 2024
In 2024, with upcoming elections, the BVA also plans to engage policymakers and clarify the role of private equity. They aim to bridge the gap between government and private equity by presenting themselves as part of the solution. Alexander: “The government has limited resources, especially in Belgium with a high public debt. At the same time there are societal challenges: digitalization, infrastructure, energy transition, who will pay for all that? We have a private market that is strong. There is a lot of money in Belgium, and there is also a willingness to invest, so we try to find each other there. We also continue to explain that our industry invests a lot in young and fast growing companies that create the jobs of the future.”

Jan Alexander highlights a recent success of the BVA in advocating for its members’ interests. He mentions a significant challenge posed by a proposed tax reform initiated by the Minister of Finance, which aimed to shift the tax burden from workers to wealthier individuals. BVA does not oppose a tax reform in se, but the proposed plan would have heavily impacted the VC & PE sector. “The industry is prepared to pay our fair tax share, but we do not want to be treated more strictly than, for example, in the Netherlands or France. As capital can move easily, a level playing field with neighboring countries is important”, says the Secretary general of the BVA. The proposed tax reform did not make it to Parliament.

The road to continued success
On the topic of industry trends, Alexander identifies ESG (Environmental, Social, and Governance) considerations, energy transition, AI, health, and defense as key areas of focus for PE. He underscores the importance of these trends in shaping investment decisions and opportunities within the private equity landscape.

Despite the sector’s growth and professionalization over the years, Alexander acknowledges the need for ongoing efforts to improve public perception and engagement with policymakers. By fostering dialogue, conducting research, and promoting best practices, BVA aims to contribute to the continued development and success of the private equity industry in Belgium.

The BVA aims to portray entrepreneurship, investment, and risk-taking more positively to contribute to economic growth. Alexander emphasizes the importance of building trust and fostering a positive image to encourage investment and entrepreneurship. “Over the years, the private equity sector in Belgium has grown significantly, becoming more diversified and professionalized, with various independent managers and investment entities. While well-known within the investor community, there’s still a need to increase awareness among the broader public and government officials”, concludes the Secretary general.

Read also: Benoît van den Hove, CEO and Chairman Euronext Brussels: ‘There are a lot of companies ready to go public’

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