An opportunity assessment to launch a private placement service in the Belgian market

Abstract

Although the expectations of both emitters and investors emphasize the need for a private placement service, knowledge about private placements in the Belgian market is very limited. This can be explained, for example, by the fact that not many private placement deals have been disclosed yet. Due to the changing needs of emitters, KBC Securities (KBCS) is often challenged with the expectation of its clients to offer them as many financing options as possible. Moreover, KBCS wants to keep its investor base satisfied by offering compelling solutions when it comes to portfolio diversification. Accordingly, this report was commissioned to examine the possibility of launching a private placement service on the Belgian market. KBCS’ question with regard to private placements was very clear and was taken into account to determine what type of private placements should be sought, namely “is there an opportunity to implement equity private placement as a service in the Belgian market that meets the following requirements; (1) an issuer needs to be a private and mature company (2) an investor should be professional and not operate through a fund and (3) the focus should be on large deal sizes?” Methods of analysis include qualitative research, consisting of both primary and secondary research. Involvement of experts and investors facilitated the interpretation of data and the development of a shared understanding of the private placement landscape. Data was collected using 23 interviews. Statements that follow from these interviews are supplemented with secondary research obtained through articles, journals, reports and websites. Literature review shows that the European market for private placement is strongly dominated by debt. The neighbouring countries of Belgium, France and Germany, seem to dominate the European market for private placements of debt. When debt private placements are positioned against, for example ordinary loans, it is concluded that these products are generally riskier, require a higher interest rate, are more flexible and encompass more information asymmetry. It was decided that the scope of the business case would focus solely on equity private placement for the following reasons; (1) This research points to a higher demand for equity than for debt private placements in the Belgian market and (2) KBCS is triggered by the “little crowd concept” and has a genuine interest in this equity product. Note that this focus does not necessarily mean that there are no opportunities to offer services in terms of debt private placements or combinations of both. The most important stakeholders involved in a private placement are an issuer and an investor. According to our analysis, issuers are SMEs with stable cash flows and a well-grounded future plan. Targeted investors can be both wealthy individuals and family offices. They seem to be looking for well-diversified portfolios and a high return in exchange for a higher risk. In addition, they adopt a “buy-and-hold” strategy for private placements. These potential clients find private placements appealing because, for example, they offer them flexibility and confidentiality. Interviews have indicated that a due diligence from the perspective of the investor and a screening of the emitter performed by the arranger are the services that are at least expected when an intermediary is brought in to facilitate the process. In addition, the respondents indicated that networks instead of platforms should be used to bring contracting parties together because clients greatly appreciate the personal contact that they have with the arranger. The Belgian equity private placement market is characterized by a high demand from the investor’s side, low competition and therefore a high risk of market access and a difficult to estimate supply from the emitter’s side. In terms of competition, there are only two direct competitors who offer equity private placements in the Belgian market, being SDM-Valorum, which focuses on small deals with a maximum deal size of €10 million and Degroof Petercam, which focuses on larger deals ranging from €36 to €100 million. These large equity private placement deals are only issued by listed emitters. In addition, there are two types of indirect competitors that pose a threat to the relevance of an arranger, being private equity firms and family offices. On the one hand, this study indicates that the demand from Belgian unlisted emitters for equity private placements is concentrated at the lower end of the deal sizes, since historical private placement transactions in Belgium had an average and median transaction value of €23,40 million and €4,75 million respectively. In addition, only two outliers out of 19 transactions reached a transaction value of more than €10 million. As a result, this project is aimed at a deal size between €500 thousand and €10 million. Building on this latter range of deal sizes, KBCS requested to focus on two potential revenue models, namely (1) the matchmaking model and (2) the full-fledged model. Model 1 leads to less income as a result of a smaller number of services offered, since KBCS is only obliged to bring the contracting parties together and to perform a screening, including a due diligence for both contracting parties. It was therefore decided that the income from the matchmaking model would only be based on a success fee, usually 2% to 3% of the deal size. In this case the break-even point is reached at two to three deals a year if the deal size is at least €5 million. Under model 2, the service offering from KBCS is much more extensive. As a result, it requires a fixed fee in addition to a higher success fee. According to this model, the revenue is based on the sum of a fixed fee ranging from €10 thousand to €25 thousand and a success fee of 3% to 4,5% of the deal size. The exact number of deals needed to reach a break-even point differs greatly in terms of the number of deals, the fixed fee, the success fee and the deal size. Building on this latter range of deal sizes, KBCS requested to focus on two potential revenue models, namely (1) the matchmaking model and (2) the full-fledged model. Model 1 leads to less income as a result of a smaller number of services offered, since KBCS is only obliged to bring the contracting parties together and to perform a screening, including a due diligence for both contracting parties. It was therefore decided that the income from the matchmaking model would only be based on a success fee, usually 2% to 3% of the deal size. In this case the break-even point is reached at two to three deals a year if the deal size is at least €5 million. Under model 2, the service offering from KBCS is much more extensive. As a result, it requires a fixed fee in addition to a higher success fee. According to this model, the revenue is based on the sum of a fixed fee ranging from €10 thousand to €25 thousand and a success fee of 3% to 4,5% of the deal size. The exact number of deals needed to reach a break-even point differs greatly in terms of the number of deals, the fixed fee, the success fee and the deal size. If KBCS decides to accept the range of services that apply to equity private placement deals that can reach a maximum deal size of €10 million, a competitive advantage can be gained. This by elaborating on its focus on medium-sized companies, its current service and client base, its reputation and its existing network. The way in which KBCS commercializes the service will be thoroughly screened by the banking committee. In addition, KBCS must be aware that offering personalized communication and assistance throughout the deal process leads to customer loyalty, interaction and long-term engagement. The latter enables them to increase market share, because loyal customers will act as a brand advocate. The KBCS website will serve as an important tool to arouse interest by highlighting success stories and a detailed plan that explains what clients can expect until deal signing. It is concluded that the private market is booming and that there is a common belief that it is a good time to implement equity private placement services. However, it is also concluded that the answer from our research to the question of KBCS is unfortunately negative. This, because the demand from Belgian emitters for equity private placements is hooked up at the bottom of the deal sizes and large deals are issued by public companies and assisted by Degroof Petercam. If KBCS continues to insist on large deal sizes, the company must admit that emitters are listed. On the basis of interviews, however, it is assumed that there is little interest from Belgian private companies to issue large equity transactions as they simply do not feel the need to grow quickly and thereby raise big amounts of capital. Private companies can be served by KBCS only if the latter is willing to offer equity private placement services for smaller transaction values. For these deals, it is recommended to use the full-fledged revenue model, as research has shown that issuers within this range need a larger number of services. It is also recommended to (1) check whether there is a need to recruit additional staff, (2) to measure success in terms of the number of deals that must be done in order to breakeven, but (3) at the same time keeping the importance of clients’ expectations and the overall strategy in mind, (4) to raise awareness of the equity private placement services and (5) to prepare themselves by picturing the profile of each investor to become a pool of potentially interested investors that can be contacted in no time if KBCS is approached by a company to support an equity private placement deal.