NETHERLANDS - The Dutch pensions regulator, De Nederlandsche Bank (DNB), is setting up guiding principals to help develop financial institutions' risk management of private equity and other alternative investments.
"The growing involvement of Dutch financial institutions in private equity is too important to ignore, hence a regulatory framework is needed," said Arnold Schilder, director of the DNB.
The principles are intended to appraise risk management with regard to alternatives, and in particular private equity, focusing on risk and return characteristics, portfolio policy, due diligence, contract conditions and monitoring, as well as communication.
The DNB is concerned that private equity funds are not under any direct supervision, which can make it harder for institutions to obtain an overview of the performance assumptions and the risk profile of investments.
"Furthermore, investments in private equity are characterised by limited liquidity and a long investment horizon, and operational and subcontracting risks play an important part," the regulator said.
Although Schilder concedes that it is "mostly a small number of large funds that have chosen exposure to private equity," he argues that the number of medium and small pension funds investing the asset class is growing. "Participation in private equity demands specific risk management," he added.
The DNB estimates that pension funds have invested around €13bn, or 4% of their total investments, in private equity and have committed an even larger amount. "Financial institutions that participate in private equity investments must have adequate risk management," said Schilder.
The regulator is adamant that there will not be a "checklist" with specific compliance conditions for institutions. Instead the DNB wants to illustrate its principles, which should function as a point of reference for investors, with a number of "points of interest and best practices".