Private equity is inextricably linked to Dutch greenhouse horticulture, Ruud van der Vliet stated in an analysis for the trade magazine Primeur earlier this year. The shares in more and more companies in the (greenhouse) horticultural chain have been wholly or partly acquired by private equity. In this article, published in the June issue of the trade magazine, he goes a step further, and Ruud wants to show that there is also a great need for private equity funds in (greenhouse) horticulture.
We have a growing food problem worldwide, and with high-tech greenhouses we can help reduce that problem. For this reason, an expansion of the high-tech greenhouse area of at least 25,000 to 40,000 ha worldwide is expected in the next 8-10 years. There is currently insufficient capacity to realize this expansion. There is a great need for upscaling, professionalisation and internationalization in (greenhouse) horticulture.
This need is recognized and acknowledged by governments and investors. The companies in the sector themselves are also seeing this more and more, which is seen by the adjustment of private equity, cluster formation and mergers of companies. Private equity has for years had increased awareness of companies in this sector. This applies not only to greenhouse builders, but also to seed companies, propagators, installers, automation companies, robot companies, successful growers, packers and processors.
High-tech greenhouses can contribute to this problem, provided that switching to sustainable energy sources such as geothermal energy and residual heat, data-driven cultivation can compensate for the lack of growers and more cultivation and harvesting activities can be automated and robotized.
It is expected that more large building clusters will be created for high-tech greenhouses, and that large growers will also be scaled up, which will deliver directly to the retail sector. Building clusters such as Arvesta and Atrium Agri are examples. Investors and governments have different needs and requirements when building high-tech greenhouses than growers. Investors and governments are asking for production guidance, a guarantee and increasingly a return guarantee.
The Dutch tomato grower Agro Care has made no secret of its ambition to grow high-tech greenhouses in 1,000 hectares within 10 years. The North American Mastronardi is another good example with 200 hectares of ‘own’ greenhouses and over 1,600 hectares of contract cultivation. The necessary scale increase and chain shortening are expected to increase growers’ yields.
The term private equity is used again and again and is therefore often controversial. In short, private equity is venture capital invested by an investment and / or venture capital company in a non-listed company. In the beginning of almost any business, venture capital contributes from family, acquaintances and friends and at a later date by more professional parties. A bank can also provide working capital and / or facilitate business investments under strict conditions and standards. Ownership of private equity is always temporary: the disposal of the share capital takes on average between 5 and 10 years. After that period, the company’s shares are often sold to, for example, another company, another investment fund, until the management or the company is listed on the stock exchange. The capital gain on the sale of the shareholding, including any dividend payments, is the ultimate return for the investment and / or private equity company.
The two main forms of private equity are buyouts and venture capital. A buyout is an acquisition of a mature company in which private equity deposits equity and usually acquires a majority stake in it. These transactions are often accompanied by contributions from bank financing. A leverage is built-in using bank financing. Venture capital refers to the contribution of venture capital to immature companies such as start-ups or start-ups.
How does private equity generate a return on its investment? The company’s return is increased through private equity through a combination of, among other things, operational improvements, strategic reorganization, strengthening governance, financial restructuring and investment selection as well as a focus on interesting (sub) markets.
In 2017, the Ministry of Finance commissioned Arnoud Boot, professor at UvA, to conduct a study on the added value of private equity. This resulted in the report Private Equity in the Netherlands: A stakeholder perspective. The conclusions of that study are more or less the same as in a previous study conducted by Boot in 2007: Private equity has, on average, a positive effect on the growth and profitability of companies where private equity is involved. In addition, despite the often higher leverage, the bankruptcy risk is not or hardly greater. According to Boot, private equity therefore contributes to economic value creation. Investment and / or venture capital companies are not investors, but investors. They are very involved in the company and are intensely involved in the question of what happens to their capital in the company. They are looking for opportunities to create value with the company. Investors, on the other hand, often have a short-term focus and add no value.
In other studies, companies with investment and / or venture capital companies also achieve, on average, a higher EBITDA margin, higher growth than comparable companies that are not supported by private equity. The reason is that private equity often provides a more objective view of the company and provides financial support, relevant (sector) knowledge, expertise and network. It is important that there is a good click between the management of the company and the investment and / or private equity fund. Private equity is not a panacea; we know examples inside and outside the (greenhouse) nursery where the click with private equity funds was not good enough. Recently, we learned about Codema’s dissolution.
Rise in private equity
Private equity will then increase in importance in the coming years. Probably also in (greenhouse) horticulture; upscaling, professionalization, internationalization and clustering require additional risk-bearing capital and support. The number of listed companies will always be very limited, and the need for venture capital is great. Companies have been confronted with tremendous dynamism in recent years. They need to operate more decisively. In this time and age, shareholders involved fit in as investment or venture capital firms.
Private equity brings in the outside world and other insights. In family businesses, necessary changes can be held back for years by emotions and / or family interests. Investment and venture capital firms have a more objective view and need to pay less attention to internal sensitivities. During a crisis, private equity is often the only one that still puts money into the company and thus ensures continuity in difficult times.
In practice, people talk about ‘smart’ and ‘stupid’ money; capital invested by private equity then falls under the heading ‘smart’ money and ordinary bank financing under ‘stupid’ money. Investment and / or venture capital companies are much more active than a bank and want to (be able to) react faster. A seat on the board is a first step in this regard, but monthly reports are increasingly shared, board meetings are held every two weeks, and multi-year plans are developed jointly. You see more and more ‘one-tier boards’ appearing, where sector experts from the investment and / or private equity firm take their place. Not to take a seat on the board, but to resonate, support and anticipate at an early stage. A bank, on the other hand, is often subsequently informed by the company. Only if payment problems arise, a bank would like to send it along, but then it is often (too) late.
Within (greenhouse) horticulture, we see a number of important developments that have accelerated the progress of private equity. We are seeing the world population grow, especially in Asia and Africa, the need for locally and sustainably grown food is increasing, agricultural land is declining and urbanization is accelerating. Food supply is becoming an even more complicated issue as a result of this development.
With Dutch knowledge, experience and network within (greenhouse) horticulture, we are able to contribute to the interpretation of this issue. With its Triple Helix (by cooperating companies, educational institutions and governments), the Netherlands has built an unprecedented lead in agriculture and horticulture. That lead is under pressure because other countries have copied our success or developed other methods. The success of high-tech greenhouses is not in doubt.
For example, 2020 research by WUR, led by Professor Leo Marcelis, has confirmed that growing fresh fruit and vegetables in high-tech greenhouses is currently the most sustainable form. Dutch greenhouse builders and installers are world leaders. The Netherlands also has the most prominent seed companies in the world. The Netherlands is also a leader in the supply of companies in (greenhouse) horticulture for climate control, automation and robotics and energy supply. On the other hand, we see that the companies operating in the (greenhouse) horticultural chain are generally relatively small. The largest greenhouse builders in the Netherlands have a turnover of approximately 200 million euros, which is good for ‘only’ a few projects a year. A fully equipped high-tech greenhouse for growing vegetables can easily cost 150-250 EUR / m2. Clustering of construction companies in high-tech greenhouse construction is therefore a necessity in my opinion.
The same goes for breeders; A certain scale is required to be able to supply retailers with fresh products sustainably all year round. Otherwise you will remain interchangeable as a breeder and you will not have a position in the chain. In fact, even the largest breeders’ associations are hardly a match for retail. For now, retail is still the most powerful party in the chain. This was caused by the rapid increase in scale and internationalization and professionalization of supermarkets. Retail is currently dictating the rest of the chain. This is undesirable from an economic and technical point of view. A company like Mastronardi shows that things can be done differently. High-tech greenhouses are very capital intensive and require a certain minimum return. Upscaling, local, sustainable cultivation with a direct relationship to the retail trade is therefore a logical development. My expectation is that there will be a further upscaling of large breeders and / or a merger of breeders’ associations. Smaller fruit and vegetable growers will act as contract growers for large growers or sell their businesses. This process is already underway and will (must) be accelerated. The flower farm will also undergo the same development over the next 10 years. Also in imitation of what is happening in North America.
Private equity can contribute positively to all these developments, provided the right parties are linked together.
Ruud van Vliet is former director of Rabobank Westland Companies and current director of Van der Vliet & Van der Oost BV. He specializes in improving and restructuring companies, especially in Food & Agri and specifically (greenhouse) horticulture. Ruud focuses on tactical and strategic issues, vision development and optimization of companies’ value.
This article has previously been published in Issue 6, Volume 36 by Primeur. See www.agfprimeur.nl.
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