Anthony O’Connor finds out what Dutch LPs are up to.
Although The Netherlands is one of the smallest countries in the EU, it has some of the largest pension funds in the region, in terms of total assets under management. It is home to well known global companies like Shell and Philips and other household Dutch names with pension funds that have been building up a tradition in investing in private equity, some since the mid 1980s.
Dutch pension funds have been among the most active and innovative compared to fund managers in other European states. “Historically, we have a number of large institutional investors in The Netherlands,” says Dan Allen at Wilshire Capital in Amsterdam. “Once you get past the larger players, the allocation levels tend to fall off. However, private equity is an area that lots of investors are looking at.”
According to a London-based manager of pan European funds, Dutch investors are forward thinking. “As institutional investors go, the Dutch are generally very well used to investing in private equity. I would say the Dutch pension funds are more aggressive in investing than, say, pension funds in the UK, for example,” he says.
“Generally speaking, The Netherlands comes after the US and the UK in terms of interest in investing in private equity. The level of interest reflects a natural development in investment approaches,” according to Reinout Slot, a lawyer at CMS Derk Star Busmann in Amsterdam.
Companies like Shell and Philips are among the largest corporates headquartered in The Netherlands with pension funds active in private equity, but they are also among the most reserved when it comes to discussing strategy. According to a source close to Shell, the global company invests around 7% of its pension fund in private equity, which is at the top end of the unofficial range. The allocation range is understood to between 2.5% and 7% of the Dutch pension funds.
“You see very few insurance companies and corporates active in investing in private equity,” said Volkert Doeksen, managing partner and chief executive officer at AlpInvest Partners in Amsterdam. “For the large pension funds it is generally normal for them to have an allocation for this alternative asset class, but for the smaller funds and other sectors, it is yet to be fully embraced.”
For those not yet active in the asset class, firms like Robeco Private Equity are offering the smaller funds seminars on the subject, and their interest is said to be growing. “What we see at Robeco is that many of the mid-size and small institutional investors are starting to look at private equity. Many of them are examining how to include it in their asset liability models,” says Andrew Musters at Robeco in Rotterdam.
What the experiences of the more vocal pension funds show is that while they have been at the forefront of embracing private equity and venture capital funds, their strategies are just as varied as the funds on offer.
Amsterdam-based AlpInvest Partners, the new name for NIB Capital Private Equity, which became effective February this year, almost exclusively represents the private equity investments of ABP. ABP represents employers and employees in the Dutch government and the educational sector and has a total pension fund of €150bn, making it the largest Dutch pension fund and one of the largest funds in Europe. AlpInvest Partners also manages the private equity investments of PGGM, providing for healthcare and social work employees, which is the second largest Dutch pension fund with assets totalling €52.5bn.
“ABP and PGGM are the two largest pension funds in Europe and have mandated us on an exclusive basis for their allocation in private equity. The mandate scope is completely equal although the accounting is done separately,” said Doeksen. “Because of the amount we manage for them, €14bn in total, it is impossible to do all their direct investments directly, that is, as a lead manager,” he adds. Given the size of programme, it is not surprising AlpInvest focuses strongly on a fund-of-funds programme, which accounts for €11bn. It also concentrates on venture capital funds and large buyout funds with the geographical split of around 45% in each of the US and Europe, with the remainder in South East Asia and Eastern Europe.
AlpInvest has a secondary fund business totalling $1.5bn. Last year, the firm was one of the major backers of the buyout of MidOcean Partners, the later stage portfolio of private equity investments owned by Deutsche Bank, providing over €300m of capital for the €1.5bn deal. A further €1.5bn is committed to its local market, encompassing the Benelux countries and Germany, making it one of the largest investors in the region. The industry focus is completely mixed and equity investments are capped at €60m, says Doeksen. AlpInvest also has €900m allocated to co-investments and an active mezzanine programme, centred on the US market. The firm currently aims to invest between €1.5bn and €2bn annually. “We’ve had two relatively slow years just gone, but now we are seeing a lot more deals in the pipeline. We’re always very selective but we can be even more selective now because the volume of deals is greater,” says Doeksen.
NIB Capital recently said it will transfer 100% of NIB Private Equity’s shares to ABP and PGGM, both of which backed the launch of the division in 1999 and also own NIB Capital. The restructuring will be accompanied by a one-off dividend payment of €130m to the pension funds. ABP and PGGM took over the former state-controlled bank, formerly called National Investment Bank, in 1999. The renamed entity then acquired AlpInvest, the Dutch private equity group, changing its name to NIB Capital Private Equity in 2000. The original name of AlpInvest is now being revived. The spin-off is the completion of a process initiated in 2002, when NIB Capital sold a large proportion of its own portfolio of equity investments to ABP and PGGM in order to improve the bank’s risk profile.
ABP started investing in private equity in the late 1980s and its allocation is around 2.5% or €3.5bn of its total pension fund while PGGM started a few years before that and has 4.9% or €2.5bn of its fund allocated to private equity.
MN Services is the third largest pension fund investing for its members, who are based in the metal and engineering industries, and has been active in private equity since 1987. It focuses on two main areas: buyouts, which account for 80% of the fund’s focus; and the remainder is in venture capital opportunities. Unlike many other Dutch pension funds, MN Services has mainly invested in US investments, but has started to look more at Europe funds recently. The geographic split is 80/20 in favour of the US.
“Theoretically, for buyout funds, there should be more low hanging fruit in The Netherlands and Western Europe,” says Robert Klap, fund manager at MN Services based in Rijswijk. “We also have some Holland-specific funds.” The pension fund’s private equity business covers France, Germany and Scandinavia and the UK, with some southern European focus. “Our strategic allocation is 5% of the pension fund and that’s what we strive to maintain. At the moment it is below that at around 4%,” Klap says. “It is difficult because high grade private equity funds are not easy to find. In general, we have done a few themed or industry specific funds. We make all investments in private equity through limited partnerships,” he says.
Ahold, the large food provider and retailer with operations in the US and Europe, is a more recent entrant to investing in private equity and one of the Dutch pension funds with a predominantly home market focus. “We decided two-to-three years ago that there should be an allocation of funds into private equity,” says Eric Huizing, fund manager at Ahold’s head office in Zaandam. “Four years ago our pension fund focused on Dutch equities and Dutch bonds.” Ahold has a cap of 2.5% of its total pension fund allocated to private equity, but as of February 2004, the total percentage allocation stood at 1.6%. “We are still trying to fulfil our 2.5% level,” says Huizing.
Ahold’s pension fund concentrates on primary funds and does not consider venture funds at this stage. It holds investments in three funds centred on the Benelux countries and North West Germany, namely Waterland, Waterland II and the NesBIC buyout fund. “What we like is the hands-on approach of the management of the Waterland board. Ahold’s pension fund managing director sits on its board,” says Huizing. Ahold is looking at becoming involved in a European fund-of-funds, with a decision likely by early March. Ahold’s officials are also talking to US colleagues about sharing information across the Atlantic, which might lead to Ahold’s European pension funds focusing on some US investments. “When we have more experience, we will look at the more risky elements of private equity,” says Huizing. “With our experience we are now more equipped to look at investments in the wider context of Europe.”
Ahold’s well publicised troubles over the last year are the basis of its own restructuring programme, which features around €2.5bn in disposals by the company by the end of 2005, coinciding with its proposed return to an investment grade rating. One Dutch institutional investor said instead of investors in the country flocking to back the troubled company, like investors did for Parmalat in Italy, they have given the whole restructuring process at Ahold a wide berth.
An example of a Dutch bank active in private equity allocation for its pension fund, which did not wish to be named, shows a relatively restrained approach to the asset class. “We see the Eurozone as our home market. Most Dutch pension funds have adopted the same strategy that we have and see the Eurozone as their home market.” Its mandate covers Western Europe but is weighted more to the US, comprising venture capital and buyouts. The bank maintains relatively limited ties with the private equity market with just six primary funds. “The best opportunities for investing were probably last year and the year before. This year the IPO window will open,” it said. “We accept that we have to pay the increased price of outsourcing our investment decisions by placing investments into fund-of-funds.” Investors are being attracted to this investment approach more and more because trying to put a private equity programme together without fund-of-funds is time consuming and resource intensive.
The bank source was, however, singularly concerned that more interest in the asset class by more investors would be detrimental to existing investors. “If billions of Euros are attracted to private equity funds, then returns will diminish. If too much money is chasing too few investment opportunities then that could make the situation worse for established Dutch players.” This view is discounted by some of those raising funds. “If you compare the universe of quoted and unquoted companies, the private equity asset class can still grow considerably before the returns decrease,” says Musters.
What has been an issue for some of the smaller pension funds is that private equity is not liquid enough. “We don’t think this asset category is for us because it is too risky and the investment horizon is too long,” says Frank de Waardt from the Heineken pension fund. This is a view shared by Dick Wenting of Pensioenfonds Medewerkes Apotheken who says a five-year investment is too long for his fund. “The returns are also too uncertain,” he says.
Some investors are believed to be shy of investing in unknown asset classes particularly at a time when there is pressure on their funds. The Dutch pension fund association, VB (Vereniging van Bedrijfstakpensioenfondsen), sounded alarm bells last year when cover ratios at some funds approached deficit. While the overall industry cover ratio increased to 111.2% at the end of 2003 compared to 106.5% a year earlier, according to VB data released in February, eight of its 81 members were still in deficit. VB rules stipulate a cover ratio of at least 105%. “Private equity might not seem like a logical choice if institutional investors want to go for something less risky. However, in the long run, if pension fund coverage ratios increase, this could resolve the issue for some institutional investors,” says Slot.
Legal changes to funds in The Netherlands
Dutch funds, which are normally structured as limited partnerships (known locally as CVs), will be subject to some changes this year, according to Kees Groffen, a private equity partner at law firm De Brauw Blackstone Westbroek in Amsterdam.
Key upcoming changes mean limited partnerships will be permitted to include a legal entity for the first time. There is some concern that using a limited partnership will become generally difficult to structure. The concern over the current limited partnership structure is based on ownership of assets and because there is no defined legal entity structure, there is no defined owner of those assets in law.
“There are quite a lot of sponsors in The Netherlands who think that problems will arise,” says Groffen. “Dutch limited partnerships will be used anyhow, because there are a lot of Dutch investors who feel they need it even though they may not.” Eventually, there will be two structures: limited partnerships with no legal definition and one with a legal personality, says Groffen.
A Fund for Joint Account is expected to become a viable alternative in coming years. This is a contractual arrangement that is flexible and has no mandatory rules. It is said to have a combination of the advantages of the BV and NV structures (limited liability companies in Dutch law) and limited liability partnerships. They offer tax transparency for capital tax, are taxable for corporate income tax and are subject to the EC Parent-Subsidiary Directive.
New partnership laws are expected to come into force in 2004, enabling partnerships to elect to become a legal entity with tax transparency characteristics. The legal changes will introduce more mandatory rules for partnerships, making defaults or bankruptcy exits more difficult. No transitional provisions are expected.
Dutch limited partnerships (Dutch VCs) require individual partners to consent to any admission of partners and any transfer of partnership interests. Requirements are stricter for consents given by partners. No consent-in-advance may be given by partners. The CV structure in The Netherlands lends itself to funds with a limited amount of closings like venture capital and buyout funds.