General market evolution. In general, the market presence of private equity (PE) and venture capital (VC) funds is on the rise in Belgium. PE funds are increasingly present in Belgium and the Belgian M&A scene saw an increase of 44% in PE investments between 2015 and 2020 (M&A Monitor, Vlerick Business School, June 2021). The number of active PE firms in Belgium and foreign PE firms exploring the Belgian market more than doubled from 2000 to 2015. In 2018, the number of active PE funds increased by 25% compared to 2017.

This is the result of several factors, such as low interest rates, several tax incentive schemes (see Question 4) and recent regulatory initiatives from the Belgian government (see Question 33). In addition, Belgium mainly focuses on small and medium enterprises (SMEs), which do not necessarily benefit from initial public offerings (IPOs), resulting in Belgian companies leaning more towards PE transactions to obtain funding and to improve their balance sheets.

Crisis-related trends. Following '2020's global decrease in deal activity as a consequence of the uncertainty caused by the COVID-19 pandemic, PE funds are considered to be the fastest recovering sectors (M&A Monitor, Vlerick Business School, June 2021). It is even arguable that the number of PE transactions has almost been restored to its previous pre-pandemic level (with the exception of the VC market, which has grown noticeably quieter over the last years). The overall opinion is that the consequences of the pandemic remain the most influential factor expected to shape the (national and international) PE landscape.

Despite the recovery of the PE industry, the global pandemic has left its mark. Before 2020, PE transactions were mostly driven by a "buy and build" strategy. However, during the first lockdown in 2020, PE and VC funds shifted their focus more to supporting their existing portfolio companies through, for example, "revenue improvement" (M&A Monitor, Vlerick Business School, June 2021).

In 2021, focusing on "growth" of existing portfolio companies remained a major tendency among certain PE funds to create value (M&A Monitor, Vlerick Business School, May 2022). Exceptions to the rule include, for example, the telecom sector in which the "buy and build" strategy remained the principal approach. This can be explained by the increased reliance on telecommunications during the COVID crisis. In spite of this trend, at present, PE and VC funds' overall focus post-COVID has already begun to move back to its previous patterns.

In addition, it is clear that criteria such as digital and online capabilities, which were already increasing in importance, have undergone an exponential acceleration during 2022.

In addition to the pandemic and its effects, the market is facing increasing inflation levels, steeper interest rates and supply chain problems due to the current geopolitical tensions. Whether, and to what extent, PE-backed transactions will be affected by these issues remains unclear, even though most professionals seem to expect the number of transactions to continue increasing, possibly at a slower rate and involving lower values than before (M&A Monitor, Vlerick Business School, June 2022).

Other market trends. Another market trend is the continuing change in investment focus, that is, the increasing attention on companies that highly value sustainability and their environmental, social and governmental (ESG) impact on society.

Finally, there is an increased use of management pooling vehicles in Belgium. Belgian companies can foresee in the possibility for the board to require the management/founders to transfer their shares in the holding company into a private foundation (private stichting) in exchange for which they receive depositary receipts. The rationale behind this is to centralise the decision-making bodies to maintain stable and swift governance throughout the holding company.

The level of activity in relation to fundraising by PE funds has increased. This has been a continuing trend over the past few years. In addition to investing on the Belgian stock exchange, investing in PE funds is becoming a diversifying factor in a Belgian investor's portfolio. This trend is supported by the fact that PE funds are less vulnerable to macro-economic turning points (for example, the global pandemic or Brexit). During periods that are considered to be bad investment years for the stock exchange (2011 and 2018), PE funds have offered on average higher returns than listed stock market indices.

Overall, on a national and international level, it is clear that biotech, healthcare, communications, computer and electronics (ICT), business services and logistics continue to be the most active sectors in terms of PE transactions. In addition, the market shares of biotech, healthcare and ICT have grown the most in light of the global pandemic.

Investments in Belgian companies in 2021 included:

The investment distribution by sector was (amount invested):

The most common PE transactions in Belgium remain management buyouts and buy-ins, both often used as tools for the "buy and build" strategy.

These transactions are considered to have made the fastest recovery of all M&A deals after the decline in 2020. From 2016 to 2020, PE or VC funds were involved as a party in 36% of all Belgian M&A deals (on the buyer's side and/or on the seller's side). In addition, a positive correlation can be established between the presence of PE and VC funds and the deal value of transactions.

There has been a slight decrease in the number of exits by PE funds, most likely caused by the global pandemic. Due to the lack of potential buyers, PE funds that planned an exit tended (and are tending) to wait until the macro-economic climate becomes more favourable to receive higher exit multiples.

IPOs are one of the least common exit forms in Belgium. In 2019, only one Belgian company entered the Belgian stock exchange (Sequana Medical NV). In 2020, despite the rather uncertain climate, four companies entered the Belgian stock exchange (UnifiedPost NV, Nyxoah NV, Hyloris NV and Inclusio NV).

PE provides equity capital to non-listed companies to let them develop new products and technologies and to strengthen their balance sheets. VC is a subcategory of PE focusing on companies in their launch, early development or expansion phase.

The basis of the difference between PE and VC is their investment stage: while PE focuses on mid- to long-term investments in companies in their growth phase, VC funds are particularly interested in companies in their launch and early development phases, with an IPO or sale in a few years as their main goal, making them more focused on the short term.

Due to the difference in investment stages, they also differ in the risk attached to the investment in portfolio companies (the risk of VC investments tends to be bigger than that of PE investments), and in terms of the duration of the investing funds (see Question 8).

The sectors of portfolio companies also tend to vary depending on the kind of investment. VC transactions are most common within pharma and healthcare, which can be explained by the fact that these sectors are known to require large funds in their early development stage (which mainly go to research and development).

PE funds in Belgium typically use institutional investors, family offices, governmental institutions, banks and other asset management companies as their main funding sources. VC funds typically obtain their funding from family offices, private funds and/or individuals acting as angel investors. Other, more rare investors in VC funds are government-backed institutions and investment companies, such as Participatiemaatschappij Vlaanderen NV, Limburgse Reconversiemaatschappij NV, Federale Participatie-en Investeringsmaatschappij NV and Belgian Growth Fund Comm V.

The most well-known and frequently used tax incentive schemes to encourage investments by PE funds in unlisted companies are:

Other tax incentives include:

These tax incentives are available to all investors and are most frequently used in the following sectors: innovation and R&D; operation, supply-chain, restructuring; sustainability; technology and digitalisation.

See above, Incentive Schemes.

The most frequently used legal forms for the incorporation of a PE fund include:

In addition, following the entering into force of the AIFM Law, the Belgian legislator introduced the (amended) private privak in 2007 as a specific type of alternative investment fund. Its sole purpose is to collectively invest in non-listed early-stage development companies. It can only be incorporated as a NV, BV or Comm V.

To explain the different taxation rules applying to investors in PE funds in Belgium, a distinction must be made between private privaks and non-private privaks.

The private privak is an investment vehicle introduced by the Belgian legislator as a specific type of alternative investment fund with the sole purpose of collectively investing in non-listed early-stage development companies. It benefits from fiscal transparency as it is virtually exempt for direct and indirect tax purposes. The tax rules for private privaks are essentially the same for both foreign and domestic investors:

Limited partnerships that do not qualify as a private privak are comparable to UK limited partnerships. Therefore, they are likely to be regarded as tax transparent vehicles under UK law and in most other continental jurisdictions.

Due to the favourable Belgian tax regime, foreign fund structures are uncommon in Belgium. Foreign PE fund structures that are most frequently used are also tax transparent, such as Dutch gemeenschappelijke beleggingsfondsen, French fonds commun and English unit trusts.

When a foreign PE fund is not tax transparent, it is subject to taxation on realised capital gains, dividends and other income received in Belgium, if they are attributable to any Belgian establishment in the same way as Belgian resident companies (non-private privaks). A Belgian establishment is a fixed place through which the professional activities of a foreign company are entirely or partly conducted in Belgium. This is similar to the definition of a permanent establishment under the tax treaties. An investment vehicle cannot claim the benefits of double tax treaties on the basis that it is subject to a more favourable tax regime in its home jurisdiction. If treaty protection is not available, the investment vehicle is liable to tax in Belgium.

The duration of a fund depends on several factors, such as its investment focus, its size and/or its expected rates of return. On average, the life of a PE fund ranges between ten to 12 years. VC funds tend to have a shorter life span by aiming for an exit of their portfolio companies within three to seven years on average.

The main objective of PE investments is to maximise their return on investment when a portfolio company exits. This is usually done by expanding the operations of the portfolio companies and generating their value. The returns on their investment are often based on the internal rate of return over the period of their life span.

The investment objective of VC funds is typically focused on participating in funding rounds, which will eventually result in an exit in the form of a private sale or an IPO. The objective of PE funds is geared towards more mature financing rounds in companies often in need of revitalisation.

As a result of the vast emergence of start-up companies, new players, such as large corporates, are entering the VC sector. Their objective slightly differs from that of traditional VC funds. Contrary to the latter, large corporates have started buying stakes in new and innovative companies (that might become potential competitors) with the aim of maintaining and securing their own competitive advantage and/or their access to new and improved technology. This is referred to as "corporate venturing."

To be added to the national list of alternative investment fund (AIF) managers and as required under the AIFM Directive, fund managers must have authorisation from their competent national authority. In Belgium this is the Financial Services and Markets Authority (FSMA).

In addition, under Belgian Royal Decree of 23 May 2007, before making any investments, the founders of a private privak must also notify the federal government's finance department of the fund's incorporation.

A PE fund is subject to the general regulations of the BCCA.

PE funds also fall under the AIFM Law which was introduced in the aftermath of the financial crisis of 2008. This law introduces an extremely detailed set of rules applying to the fund managers of one or more alternative collective investment funds. Collective investment funds are defined as raising capital from several investors with the sole purpose of acting in the interest of the investors, and in accordance with a particular investment strategy.

The Belgian legislator amended the Belgian Royal Decree of 23 May 2007 in 2018, making the private privak an even more suitable form of alternative collective investment fund. The qualification of an alternative collective investment fund as a private privak is, however, subject to several requirements, including:

When marketing and promoting of shares in an alternative collective investment fund, FSMA standardised private placement notification forms must be used. In the event of a public offer, Belgian laws on prospectuses apply.

Despite the stringent regime introduced by the AIFM Law, there are several exemptions in the form of a lighter regime applicable to two types of smaller fund managers, where the fund manager has either:

PE funds that fall below these thresholds are, in principle, not subject to the stricter provisions of the AIFM Law.

No specific restrictions apply under Belgian law on (domestic/foreign) investors. However, PE funds can impose internal restrictions on their investors in the articles of association, shareholders' agreement, internal regulations or any other internal document.

In general, no specific restrictions apply to maximum or minimum investment periods or amounts. However, the Royal Decree of 23 May 2007 does impose several restrictions on private privaks, including:

The rights and obligations of the investors are most frequently set out in the internal rules of the fund (the articles of association, shareholders' agreements and/or internal regulations). These documents typically contain the following clauses:

The FSMA often publishes circulars, announcements and guidelines on the obligations of fund managers of alternative collective investment funds. In addition, in 2005 the Code Buysse on corporate governance for non-listed companies was published for the first time and has been kept up to date each year. The Code contains a specific chapter on recommendations for private equity.

PE transactions use different types of funding instruments, ranging from purely equity driven to quasi-equity driven transactions and debt-driven transactions. Equity driven means an investment through share acquisition, whereas quasi-equity means an investment by acquiring securities that are convertible into shares at a later stage. Debt financing is often used in buyout transactions (see Question 22).

In equity driven transactions, shares are often split into different classes (including ordinary and preferred shares). Certain privileges attach to preferred shares, such as liquidation preferences, appointment rights and veto rights.

Other forms used to structure the equity obtained in PE transactions include profit certificates, bonds, carried interests and management incentives (through ratchet shares, subscription rights and profit certificates).

Under the BCCA, shares in an NV are freely transferable. However, the BCCA provides for the possibility to deviate from it by introducing transfer restrictions in the articles of association and the shareholders' agreement. These restrictions typically take the form of a lock-up, a pre-emption right, a tag-along right and/or a drag-along right.

There has been an increase in the number of auction procedures used to structure buyouts. However, because the Belgian legislator has not imposed any specific rules on this, there is no absolute obligation to sell to the highest bidder.

In addition, a positive correlation can be established between the frequency of auctions being used and the deal value of the PE transaction.

Buyouts by PE funds of listed companies are extremely rare.

Typical documents produced in a buyout include:

Typical clauses include:

It is common for portfolio company managers to enter into management agreements in the context of PE or VC transactions. Such agreements typically contain the following clauses:

Key managers often hold equity as well and are often required to forfeit all or some of their equity if they leave the company. If so, the applicable purchase price for the manager's equity and the number of forfeited shares depends on the circumstances of their departure. If the manager of the company is dismissed for cause (such as gross fault, fraud, wilful misconduct or violation of the non-compete obligation) all shares will be forfeited at less than market value (a "bad leaver"). In other circumstances (such as death, disability or termination without cause by the portfolio company), all shares will be forfeited at market value (a "good leaver"). A third option focuses on when a manager leaves earlier than agreed, in which case a reverse vesting scheme can be applied with regard to the number of shares that will be forfeited at less than market value (an "early leaver").

In addition, it is quite common to add an option for the board to pool the management's equity whenever a leaver event occurs and, for some reason, the shares are not forfeited. This way, the company's governance remains centralised.

The specific aspects of the managers' role and mandate within the company are often established in a management agreement, which contains clauses on the compensation, function description, intellectual property transfer, non-competition and non-solicitation and leaver provisions. Leaver provisions are often linked to the management agreements through the shareholders' agreement.

PE funds are often granted the right to appoint one or more members of the board of directors as their representatives. This right can be included in the articles of association, but is much more likely to be found in the shareholders' agreement because of its contractual and confidential character (compared to the public character of the provisions of the articles of association).

Another mechanism used to give PE funds control over the company's activities is to grant veto rights over high-impact decisions on governance and on shareholders' levels. These veto rights (and other privileges) are sometimes structured by creating different classes of shares within the company's share capital, or can be granted to the PE fund in the shareholders' agreement ad nominatum.

In general, a substantial part of financing a buyout transaction is provided by debt, which can be as high as 80%. The most regularly used sources of debt financing include loans from institutional investors, financial institutions and, in private acquisitions, the sellers themselves (vendor loans).

Institutional investors usually lend money directly to a company by purchasing privately placed bonds without an investment bank acting as a placement agent. There are also a number of PE funds that provide mezzanine finance on itself or as a supplement to the grant of another loan facility.

Commercial banks have always been one of the main sources of debt financing in Belgium. For larger loans, one or more banks generally arrange a syndicated facility.

In the context of the COVID-19 pandemic, PE funds have resorted more to private debt or alternative debt providers, which is a relatively new trend in Belgium. Another remarkable feature is the rise of government initiatives to support companies, for example, the option for start-ups and scale-ups to apply for subordinated convertible loans granted by Participatiemaatschappij Vlaanderen NV, a government-backed investment company.

Subordination clauses are often used in loan agreements, as well as inter-creditor agreements. Other forms of protection often used by financial institutions providing debt financing include securities rights vested on the shares or assets of the company.

Before the new BCCA came into force, financial assistance by the target company to the purchaser of its equity (by providing loans, advancing funds or pledging assets to the purchaser) was prohibited, unless certain specific and extremely restrictive conditions were met. Consequently, financial assistance was rarely applied in Belgium.

As a result of the new BCCA, the rules on financial assistance in a BV became more flexible by switching the general principle from "prohibited, unless …" to "allowed, but subject to…" In principle, financial assistance is allowed, but remains subject to specific conditions.

The conditions with which financial assistance must comply are more or less the same for both BVs and NVs. They include:

The question is whether the shift in the underlying rationale of the rules results in simplification in practice or is merely theoretical.

There are no exemptions to this regulation.

The order of priority of creditors during an insolvent liquidation is:

A debt holder can achieve equity appreciation through conversion features such as the right to convert a loan into equity, subscription rights (formerly known as warrants) and options. These features are often structured through convertible loan/bond agreements or promissory notes.

Leverage only becomes visible on conversion of the instruments into equity. For example, when a company raises cash from an external investor, the holder of outstanding debt can decide to convert its debt simultaneously with the external investor at the same price per share minus a certain discount (20% to 30%). The discount acts as compensation for the risk the debt holder took by providing the cash at an earlier stage than the external investor.

A common management incentive is to grant company managers a combination of shares and options in accordance with an approved stock option plan. The beneficiaries of a stock option plan can benefit from favourable tax treatment (see Question 28). A stock option plan can also provide a vesting scheme as an incentive to prevent the managers from leaving the company early.

Belgian PE funds often opt for ratchet shares as an incentive. Ratchet shares are often introduced as a separate class of shares (attached to an existing class held by the managers), whereby the holders are incentivised to reach a certain money multiple at exit, at which their share in the exit proceeds increases. Contrary to the stock option mechanism (which can be used for company managers, employees, consultants and/or directors), the ratchet shares mechanism is specifically designed to incentivise company managers.

As for severance protections (such as severance payments and notice periods) employees are bound to what is established in Belgian labour law. For self-employed managers or consultants, these provisions are principally agreed on a contractual level.

The above applies to PE funds, VC funds and any other fund structures.

Belgium provides a tax incentive regime for company managers when they are issued stock options through an approved stock option plan. Under this favourable treatment, it is possible for physical holders of stock option rights to pay relatively low upfront tax (18%) at the time of the grant and to realise a tax-free capital gain (provided that the options are not exercised earlier than three years from the date of the grant). In addition, subject to several strict conditions, the percentage can be decreased to 9%.

The BCCA also states that in the event of a capital increase, shares can also be issued to employees at a 20% discount of the price per share. This discount will be exempt from both income tax and social security contributions.

In 2019, new thin capitalisation rules were introduced following the implementation of the Anti-Tax Avoidance Directive ((EU) 2016/1164). The rules stipulate that "exceeding borrowing costs" will only be deductible in the tax period in which they are incurred and only up to the higher amount of either:

The rationale behind this new rule is to push back on international shifts in profit.

One restriction on dividends or any other kind of distributions of profits in a BV is the "double liquidation/distribution test" in the new BCCA. Before any kind of distribution of profits, a BV is subject to both:

If the double liquidation/distribution test is not honoured, the shareholder can be made to reimburse the dividend payment payment (irrespective of its good faith).

If a shareholder in an NV receives a dividend distributed in violation of the BCCA, the shareholder cannot be made to reimburse it if they were acting in good faith.

Where there are dividend distributions, interest payments or any other payments in violation of the BCCA, the members of the managing body will be liable both with regard to the company and third parties.

Anti-corruption laws, together with other environmental, social and governance regulations, are gaining importance in the context of PE transactions. This new development is seen both in the due diligence phase and later on. The key findings will often be introduced in the representations and warranties of the transaction.

In relation to any capital increases, including PE transactions, the BCCA states that increases must take place before a notary public. All parties and investors must prove their identity and their ultimate beneficial ownership by presenting an ultimate beneficial ownership form. A second development in this respect is the obligation on Belgian companies to establish and frequently update an ultimate beneficial ownership register hosted by the Belgian government.

Under the Belgian law on the prevention of money laundering and the financing of terrorism and the restriction on the use of cash of 2017 (as amended from time to time, and most recently in June 2021), the penalties attached to these matters are financial in nature and can reach up to 10% of the annual net assets for financial professions, and from EUR250 to EUR1.25 million for non-financial professions.

The most commonly used exit forms are:

Although the IPO remains the most prestigious and profitable exit, a secondary sale and a trade sale remain the most popular exit forms in Belgium.

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If a company is unsuccessful or distressed, the forms of exit for a PE fund do not differ much from the ones in a positive scenario (see Question 31). In the case of a secondary sale, the company ultimately maintains control over the transaction.

Other forms of exit include filing for bankruptcy, or the dissolution and liquidation of the company. In a bankruptcy, the company itself is deprived of its assets. A third party is appointed by the court as a trustee of the bankruptcy to manage the joint liquidation and distribution of assets to debtors. When a company is being dissolved (activities are ended) and liquidated, it appoints one or more liquidators. As a result, the control remains in the hands of the company and its shareholders. However, if the liquidation turns out to be in deficit, the rules in relation to bankruptcy (that is, appointment of a trustee in bankruptcy) will apply.

See above, Forms of Exit.

Following the Foreign Direct Investments (FDIs) Screening Regulation ((EU) 2019/452) (FDI Screening Regulation) and the publication of the European Commission guidelines for ensuring a strong EU-wide approach to FDI screening, the Belgian federal and regional governments are seeking to implement the FDI Screening Regulation by establishing a new screening mechanism for FDIs.

A new screening body (the Interfederal Screening Commission) was set up and was expected to enter into force end of July 2023. It will be tasked with reviewing certain foreign investments which are considered at risk of endangering national security and/or sensitive information.

While PE-deals, as well as the broader M&A- transactions, will undoubtedly be affected by the new FDI regulations, the concrete impact is impossible to assess, as the Belgian federal and regional governments have not yet issued any clear legislation on the subject.

Without a doubt, the COVID-19 pandemic, as well as other uncertainties in today's macro economy (see Question 1), have acted as stimulating factor in this respect.

Healthy European companies could be weakened financially by the effects of the pandemic and other economic factors, which makes them easy targets for foreign buyers, with the risk of know-how and/or R&D being exported abroad.

Consequently, the EU Commission proposed extending the temporary framework for state aid to allow member states to recapitalise distressed companies to mitigate this risk.

The innovations introduced by the new BCCA remain exceptionally relevant and come into play on an almost daily basis. In effect, the new BCCA has opted for a much more flexible regime with the aim of becoming the "Delaware" of Europe.

The changes that are relevant to the PE sector include:

Another development is the reform of the Private Privak Decree, which levels the playing field between them and other foreign investment funds (such as the Luxembourg SICAR). This reform resulted in an increasing number of private privaks in the first year from 50 to 69, making Belgium more attractive to foreign investors.