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Remaining active - Tjarda Molenaar, President of NVP

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Tjarda Molannar, president of Dutch private equity association Nederlandse Vereniging van Participatiemaatschappijen (NVP) speaks to Irmak Bademli about the state of the Dutch private equity market

- What trends have you seen in the past year in the Dutch private equity and venture capital market?

In 2007 we have witnessed the stable development of the market. Both the volume and value of deal activity have remained at around the same levels as those observed in 2005 and 2006.

The ongoing discussions among the public about private equity activities as a sector did not affect the number of deals, but they have been keeping us busy. Since 2006, politicians and the press have called for more regulation in the industry. Large private equity deals drew public attention, but it only became clear later in the discussion that hedge funds are the greater concern. There will be changes in the regulations concerning the trading of quoted shares, but we do not expect any changes in the laws governing private equity. Private equity investors have longer time horizons and they usually invest in small or mid-market companies. They are not taking private all the companies listed on Euronext. Large take privates are incidents, not the mainstream trend.

In May we published a draft Code of Conduct to provide an answer to the questions raised in these discussions. As of May 2008, it will be binding to our members once it is accepted in the General Assembly.

- How has the credit crunch affected the private equity industry in the Netherlands?

The credit crunch hardly affected the mid-market. The number of mid-market deals up to EUR1bn transaction size are not affected by the credit crunch. Leverage schemes are a bit less aggressive and it may take more negotiations to find the leverage, but we did not see deals not reaching a close because of a lack of leverage.

The number of deals above EUR1bn, however, have dropped. The only deal in that segment was CVC's delisting of Univar. We have witnessed around 10 deals in the EUR100m-EUR1bn range, about the same number as that in 2005, and double the number of 2006.

- How will the implementation of the Takeover Directive affect potential delistings in the Netherlands?

We do not expect it to have an affect in terms of the number of delistings. However, it brings more openness and clarity and more rules on what you make public when you make the offer. The issue of the lack of transparency is partly solved by the rules. For example, shareholders who hold more than 3% of the shares of a company will have to disclose their identity - this threshold used to be 5%. Everybody will know who the main shareholders of a company are. Furthermore, if you hold more than 30% of the company, you have to make an offer to acquire the rest. A few shareholders who are acting in concert will also have to make a bid if their total shareholding exceeds 30%. It will be more difficult for minority shareholders to block a delisting without making a long-term commitment themselves.

- What will be the affect of the implementation of Markets in Financial Instruments Directive (Mifid)?

The regulations brought by Mifid would potentially affect fundraising and communication to funders. However, we do not expect a big influence on Dutch private equity firms. Many of the private equity funds are captive funds of banks or insurance companies. Independent funds are usually raising their funds with large institutional investors, which are regarded as professional parties. The lawyers who looked at the regulation concluded that Dutch funds will not be affected by the new rules.

- How will the newly-introduced VBI funds influence the private equity industry?

The tax-exempt VBI funds will not be used in the private equity industry. They are active in other types of investments.

We have been lobbying for improving the conditions for private equity funds in the Netherlands. It is more complicated for foreign investors to invest in the Netherlands than it is in Belgium or Luxembourg. It is not clear whether it is tax-neutral for them to invest in Dutch funds and then take their money out. The private equity funds need to devise complicated structures to make sure their foreign investors can invest free of tax and get their money out free of tax. The SICAR structure in Luxembourg, for example, is much more convenient for private equity funds.

Holland Financial Centre is the joint initiative of the Government, the financial industry and advisers, which aims to improve the investment conditions in Holland and bring Holland forward as a financial centre.

- What are your expectations for 2008?

We expect 2008 to bring more clarity to the discussions about private equity. The public will realise that very large international deals involving well-known companies do occur, but are not the norm. Private equity is a longer-term investment, not a short-term investment. This means that private equity firms are investing in marketing, personnel and R&D, which usually lead to an increase in revenues, number of jobs and higher profits. We have to get this story out to policy makers and opinion leaders.

We expect the mid-market buyout market to remain very active. Technology investments will increase, because technology funds have been able to raise new money in 2007. We expect more investment in media, information technology and telecommunications. Prime Technology Ventures and Van den Ende & Deitmers, for example, have raised funds in 2006 and they started investing quite actively in 2007. Life sciences investors such as Aescap, Gilde Healthcare and Life Sciences Partners have funds available for investments.

The Department of Economic Affairs provides a 'seed facility' for start-up companies, which provides 50% of the investment value as a subordinated loan. Not only do existing VCs take part in this scheme, but also new teams of informal investors have started new funds. This is the first step towards successful start-ups, as funds become available. Fund proposals are ranked according to the track record of the management to make sure the management teams are professional. The scheme is administered by professional investment managers and private investors. Previous schemes were run by government agencies and they used different criteria for investment than value creation. They prioritized the number of employees a company employs or the chances to keep a company in a certain region. As a result, these companies could not find follow-up financing from professional investors.

- What initiatives is NVP undertaking to keep LP interest alive in the industry?

We have prepared a brochure on why and how to invest in private equity for institutional investors. We are also organising a yearly conference and informal meetings with institutional investors that want to be kept up to date. The communication between fund managers and investors is fact-based, but the investors have been telling us that we could do better. We are working on creating a better understanding between investors and funds.

- How is your relationship with large international funds?

Dutch teams of international funds are our members, such as 3i, Bridgepoint and HgCapital, but they are in fact mid-market players. There are not many Dutch funds that do large deals on their own, as they are not big enough to invest in multi-billion euro deals. AlpInvest is the only one that co-invests in large deals. In the space between EUR100m and EUR1bn there are a lot of Dutch private equity firms.

Markets in Financial Instruments Directive

The European Markets in Financial Instruments Directive (MiFID) was implemented in the Act on Financial Supervision (Wet op het financieel toezicht, Wft) on 1 November, 2007. MiFID replaces the Investment Services Directive, and aims to to promote cross-border competition between financial firms and to better safeguard the interests of investors, in order to realise a more efficient and more integrated European market.

New statutory requirements now apply with regard to all financial firms that provide investment services or perform investment activities, such as banks, stock exchanges, and asset managers. The law entails a change in important rules of conduct such as 'know your customer' and 'best execution', stricter transparency requirements and better information that is more tailored to the investor.

The MiFID does not entail any substantial changes in the powers of the Netherlands Authority for the Financial Markets, which has been responsible for supervising the operation of the financial markets.

New Benelux fund regimes

Luxembourg: Specialised Investment Funds (SIF)

On 13 February 2007, Luxembourg enacted the law on specialised investment funds (SIFs). The law replaces the 1991 law on undertakings for collective investment (UCIs), commonly referred to as institutional investor funds, the securities of which are not intended to be offered to the public.

The law substantially broadens the authorised investor base. Any institutional, professional or 'well-informed' investor may invest in, initiate or launch a SIF. A SIF should generally not invest more than 30% of its assets or commitments in securities of the same kind issued by the same issuer, due to a risk diversification policy.

During the first six months of the new regime, more than 100 SIFs were launched successfully. They have a wide selection of investment policies ranging from traditional securities funds to infrastructure, logistics, private equity and hedge funds. SIFs are also being used for a variety of fund-of-funds, umbrella funds and master/feeder funds.

Netherlands: VBI

On 1 August, 2007, the Netherlands introduced a new tax-exempt regime for investment funds. The new regime, vrijgestelde beleggingsinstelling (VBI) is now available alongside the existing fiscale belegginsinstelling (FBI). The VBI is only permitted to make passive investments in certain financial instruments, such as marketable shares, bonds, other securities including interests in investment funds, instruments commonly traded through an exchange, commodity derivatives, forward contracts, swaps, contracts for differences and options on the aforementioned instruments. The fund is not permitted to make direct investments in real estate and mortgage loans, although an exception has been made for indirect investments in foreign real estate.

VBIs may offer interesting opportunities for real estate funds that invest indirectly in non-Dutch real estate through tax transparent or non-tax transparent entities, investment funds that invest in transferable or listed securities, fund-of-funds, and feeder funds. As they can only make passive investments, VBIs are not likely to be used as private equity funds.

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