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Ruud van der Vliet:

"Private equity can give Dutch (greenhouse) horticulture an extra boost"

Private equity and Dutch greenhouse horticulture are inextricably linked, Ruud van der Vliet stated earlier this year in an analysis for the trade journal, Primeur. Private investors are wholly or partially acquiring an increasing number of  (greenhouse) horticulture companies. In this article, published in the June issue of Primeur, he takes this a step further. He wants to show that private equity in the (greenhouse) horticulture sector is also very much needed.

"Food security is becoming more and more of an issue worldwide," Ruud writes. "High-tech greenhouses can contribute to reducing this problem. That is why the global high-tech greenhouse area is expected to expand at least 25,000 to 40,000 ha in the next eight to ten years. However, there is currently insufficient capacity to realize this expansion. Horticulture and greenhouse horticulture desperately need to grow in size, professionalize, and internationalize.

Governments and investors acknowledge and recognize this need. The companies in the sector, too, increasingly see this, as evidenced by the adaptation of private equity, clustering, and merging of businesses. Companies in this sector have been on private investors' radar for years. That applies not only to greenhouse builders but also to seed companies, growers, installers, automation and robotic companies, successful growers, packers, and processors.

High-tech greenhouses can help solve this issue. They must, however, switch to sustainable energy sources like geothermal energy and residual heat. Also, data-driven cultivation can compensate for the lack of growers, and more cultivation and harvesting activities must be automated and robotized.

More large high-tech greenhouse construction clusters are expected. Large growers, who supply retailers directly, are also likely to expand. Building clusters such as Arvesta and Atrium Agri are examples. Investors and governments' needs and requirements for the construction of high-tech greenhouses differ from those of growers. Investors and governments want production guidance, guarantees, and, increasingly, yield guarantees.

Dutch tomato growing company, Agro Care, has made no secret of its ambition to have 1,000 ha of high-tech greenhouse cultivation within ten years. North America's Mastronardi, with its 200 ha of 'own' greenhouses and more than 1,600 ha of contract cultivation, is another good example. The required scale increases and supply chain shortening should improve growers' returns.

Risk-bearing capital
Private equity is an all too often used term and is thus, often controversial. In short, private equity is risk-bearing capital that investment and venture capital firms put into an unlisted company. When almost all these businesses start, family, business partners, and friends contribute this risk capital. At a later stage, it is by more professional parties. A bank can also, under strict conditions and standards, provide working capital or facilitate business investments.

Private equity ownership is always temporary. It takes between five to ten years for people to dispose of this equity. Then the company shares are often sold to, say, another company, investment fund, or the board of directors management. Or the company goes public. What is an investment and private equity firm's end goal? The capital gain on the sale of the equity interest, including any dividend payments. 

Private equity takes two main forms: buy-outs and venture capital. A buy-out is the acquisition of a mature company. Here, private equity brings in equity and usually obtains a majority stake in return. Bank financing, which offers a leverage effect, is often part of these transactions. Venture capital involves injecting risk-bearing capital into immature companies like start-ups or emerging businesses.

Added value
How does private equity generate investment returns? Private equity improves a company's returns by combining operational improvements, strategic reorientation, governance strengthening, financial restructuring, and investment selection, and focusing on interesting (sub)markets.

In 2017, the Dutch Ministry of Finance commissioned Arnoud Boot, a University of Amsterdam professor, to look into what value private equity adds. That resulted in the Private Equity in the Netherlands: A stakeholder perspective report. The research had very similar findings to a study Boot had done in 2007. On average, when it is involved, private equity positively affects companies' growth and profitability.

Also, despite the often higher leverage, bankruptcy is less of a risk, if at all. So, according to Prof. Boot, private equity contributes to economic value creation. Investment or private equity firms become truly invested in the companies. They are very involved and very concerned with what the business does with their capital. They look for opportunities to create value with the company. Traditional investors, on the other hand, often have a short-term focus and do not add value.

Businesses with investment and private equity firm involvement also achieve, on average, a higher EBITDA margin and higher growth than similar, non-private equity-funded companies in other studies. That is because private equity often offers a more objective view of the company and financial support.

It also offers relevant (sector) knowledge, expertise, and networks. It is essential that a company management board clicks with the private equity firm. Private equity is not a cure-all; there are instances both within and outside the (greenhouse) horticulture sector where that click was not good enough, as recently learned with the collapse of Codema.

The rise of private equity
Private equity will gain importance in the coming years. After all, scaling-up, professionalization, internationalization, and clustering require additional risk-bearing capital and support. The number of listed companies will always remain very limited, and there is a great need for risk-bearing capital. The world has changed rapidly in recent years. Companies have to operate more and more decisively. This is an ideal time for committed shareholders such as investment or private equity firms to get involved.

Private equity brings insights and the outside world in. In family businesses, the family's emotions and interests can delay the changes needed, often for years. Investment companies and private equity firms have a more objective stance and need to take less account of internal sensitivities. During a crisis, private equity is often the only company still putting money into the business. That thus ensures continuity in difficult times.

In practice, people sometimes use the terms 'smart' and 'dumb' money. Capital contributed by private equity is 'smart' money, and regular bank financing is 'dumb'. Investment or private equity firms adopt a much more active approach than banks and want to (be able to) respond far quicker. A seat on the supervisory board is the first step. Monthly reports are then increasingly shared, there are fortnightly board meetings, and multi-year plans are developed jointly.

More and more one-tier boards are being created where sector experts from investment and private equity firms have a seat. Not to take the board's place but to act as sounding boards, support, and anticipate things early on. On the other hand, companies often only inform banks after the fact. Banks only want to get involved when there are payment problems, but by then, it is frequently already (too) late.

Important developments
There are several important developments in the (greenhouse) horticulture sector, hastened by the rise in private equity. The world population is growing, particularly in Asia and Africa. There is a greater need for local, sustainably grown food, agricultural land is shrinking, and urbanization is accelerating. These developments further complicate the food supply issue.

Dutch know-how, experience, and (greenhouse) horticulture network allows the country to help solve these problems. The Netherlands has a Triple Helix of cooperating businesses, educational institutions, and government. It has thus built up an unprecedented lead in the field of agriculture and horticulture. That lead is under pressure, though, because other countries have copied the country's success or have developed different methods. But, the success of high-tech greenhouses is not in question.

Professor Leo Marcelis led a Wageningen University and Research study in 2020. It confirmed that, at present, high-tech greenhouse fresh fruit and vegetable farming is the most sustainable cultivation method. Dutch greenhouse builders and installers are world leaders. The Netherlands also has the world's best seed companies and leads in the area of supplying (greenhouse) horticulture companies with climate control, automation and robotization, and energy supply systems.

Yet, Dutch (greenhouse) horticulture businesses are generally relatively small. The largest greenhouse builders in the Netherlands have an approximately €200 million turnover, good for 'only' a few projects per year. A fully equipped high-tech greenhouse for growing vegetables quickly costs €150-250/m2. I, therefore, think clustering construction companies in the high-tech greenhouse sector is an absolute necessity.

The same goes for growers: you need to be a specific size to supply retailers with year-round, fresh products sustainably. Otherwise, growers will remain interchangeable, with no position in the chain. Even the largest growers' organizations are hardly any match for retailers. For now, retail is still the most powerful chain partner, dictating the rest of the chain.

That is because supermarkets have grown, internationalized, and professionalized rapidly. This dominance is unwanted, economically and competitively. A company like Mastronardi shows that it can be done differently. High-tech greenhouses are very capital-intensive and require a certain minimum return. Scaling up and local, sustainable cultivation with a direct relationship to retail is, therefore, a logical development.

I think large growers will grow even more, and more grower associations will merge. Smaller fruit and vegetable farms will function as contract growers for the large growers or sell their business. That is already happening and will (have to) be accelerated. In the next ten years,  Dutch ornamental plant cultivation will undergo a similar development, as is already happening in North America.

As long as good parties are linked, private equity can positively contribute to all these developments."

Ruud van Vliet is a former Bedrijven Rabobank Westland director and  currently director of Van der Vliet & Van der Oost BV. He specializes in improving and restructuring primarily Food & Agri, and specifically (greenhouse) horticultural companies. Ruud focuses on tactical and strategic issues, vision development, and optimizing companies' value.

This article previously appeared in Edition 6, 36th annual of Primeur. Please see 

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