This April, the Netherlands Investment Institution (NLII) announced the launch of its first funds – a Business Loans Fund (BLF) and Subordinated Loans Fund (ALF). These already have commitments from NLII’s founding members and will start lending this summer. Robeco will run BLF, whilst Aegon will manage ALF. Both will target small and medium Dutch businesses (SMEs).
Pension funds and insurers are expected to commit €800m in total to the vehicles, and their size could reach €2bn as banks match or double the commitment made by asset holders.
Economic affairs minister Henk Kamp described the funds as an important step to structurally strengthen the Dutch economy. “Business owners can now attract much needed financing in order to invest in new products and services,” he said.
The funds are part of the Netherlands’ remedy for a European problem: how to get money to SMEs when their traditional financiers – the banks – are preoccupied with strengthening their balance sheets.
France has already established a series of funds: NOVOs and NOVIs. Ireland has reshaped the National Pensions Reserve Fund (NPRF) to create the Ireland Strategic Investment Fund, which is set to commit €2.5bn to domestic businesses.
Of the these initiatives, the last is the most straightforward. The Irish fund benefits from its own regulations, which can be adjusted as conditions dictate. Indeed, the fund owes its existence to the needs of Irish businesses taking precedence over supporting state pensions. This is not without complications – when the NPRF was established, critics such as the Heritage Foundation noted the moral hazard of the funds being diverted from funding retirement towards political ends.
In the Netherlands, the nature of the loan funds rubs up against the regulations governing long-term institutional investors. Specifically, the standard risk model of the Dutch central bank (DNB) proposes that credit rated lower than BBB (or unrated) be assumed to carry a ‘shock value’ of 530 basis points. That is to say, an investor has to make a capital provision for a drop in value of more than 5% in the loans ALF and BLF make.
The DNB said that it was not making a formal judgement on the loan vehicles. If they don’t get an external credit rating – from the likes of Moody’s, Fitch or S&P – then it is for investors to make an assessment of the credit risk. In other words, no one is saying how many basis points is the correct risk for these funds.
Robeco reckons that the loans it will make – starting at €5m in size – will be BB or BB+. On paper this puts them in the ‘530bps’ category.
The funds themselves won’t have a credit rating. Bundling up loans into a securitised vehicle with its own rating is out of favour these days after recent historical misuses. Such misuse is the very reason why the DNB demands look-through analysis of pooling vehicles to assess each underlying investment.
At a glance
• Pension funds are being targeted with proposals to increase investment within the SME sector.
• Banks are withdrawing from their traditional role of lending as regulation shifts focus to strengthening balance sheets.
• Risk assessment and due diligence are key.
Those underlying investments, the loans, are all smallish – the subordinated debt starts with tickets as small as €150,000. As loans are less liquid than debt, greater rather than less provisioning seems likely.
On the other hand, in ALF, the Dutch government will underwrite half of the principal committed by institutional investors. As Loek Sibbing, former CEO of Univest and now chairman of the NLII, indicates, this guarantee ought to lower the necessary risk capital reserves.
Some pension schemes remain angry with the paradox that they are invited to support the local economy but are penalised for the effort. One said that it is easier for individuals via crowdfunding platforms to help small businesses than for pension funds. “You might think this would put pension funds to shame but really it is the politicians who should feel ashamed,” says one senior in-house executive. “They do not care about the long-term future of this country. Let’s assume the provisioning is 530 basis points – we don’t know any better at this stage – my fund cannot afford to take that kind of risk.”
Regarding crowdfunding, the case is overstated – it raised less than €64m for Dutch SMEs in 2014 – double the sum for 2013 – a sliver of the total, and less than the BLF promises to provide. Sibbing points out that the main aim is to diversify sources of lending, so all alternatives are welcome. “We have the highest reliance on bank lending in Europe,” he points out. “We want to enable Dutch investors to back the Dutch economy. These funds represent real concrete, real opportunities to do so.”
The banks are positive. Joris Wijnen, product manager for lending at ABN Amro, describes the NLII funds as complementary to what the banks are doing. “The pension funds and insurers can take on more risk than the banks,” he says. Regarding the ALF in particular, he notes that there is no problem for SMEs getting on-going funding. “It is the funding banks have enough of.”
What about the charge that the regulations just don’t make this kind of investment worthwhile? Sibbing responds that loans certainly have to be thought of as high-risk, high-reward investments. He adds that the larger pension funds involved (the metalworkers and graphics industry fund have committed) had internal teams for assessing risk.
Sibbing feels that the problem for larger pension funds was securing a sufficiently large chunk to justify the risk assessment. “There are people knocking on my door who want a ticket of €100m,” he says. Indeed, he explains the absence of APG, the largest manager of Dutch pension assets, because it already makes these loans.
The question of size brings numerous ironies to the NLII initiatives. Sibbing explains that larger funds need to make a big commitment in order to make the assessment, an internal credit rating, worthwhile. As much as they participate in these funds, smaller schemes will follow their big peers on the back of their assessment or rely on the executive of NLII. This is natural but not in the spirit of regulation; it may gradually be prohibited and thus lead to a few huge asset owners participating.
So while everyone from the economic affairs minister down acknowledges the importance of small businesses, life becomes more difficult for smaller investors. The irony is that economic diversification requires small companies while financial diversification requires huge players.
This brings us to the role of the intermediaries, notably Aegon and Robeco.
Although the BLF is presented as a new fund, it is a rebranded version of a Robeco fund, NL Ondernemingsfonds (Dutch Entrepreneurs fund), which was launched in January 2014. This vehicle did not muster minimum commitments in the period prior to the NLII boost. Sibbing notes that there are plenty of asset managers around the world specialising in loan funds. So why select Robeco and Aegon? “Because they are top class managers and willing to dedicate the specialists to make this a success,” he says. A spokeswoman for Robeco highlighted its 22-strong credit team.
Will these funds struggle like NL Ondernemingsfonds before them? The regulations governing pension funds and insurers are not the only friction. The truth is that SMEs are struggling to find customers – this lack of demand is the biggest bar to the economic recovery of the Netherlands and Europe.
Successful and unsuccessful applications for business loans with ABN Amro are falling since the Q1 2013. The number of successful applications has marginally increased since Q2 2014 but this coincides with the announcement and delivery of the European Central Bank’s Targeted Longer-Term Refinancing Operation: €400bn of cheap money specifically for businesses, almost half of which was not taken up.
If the ECB cannot kick-start a growth in Europe’s smaller businesses with cheap loans, then everyone has to be realistic about the problem – and the likelihood of success of the NLII funds. Sibbing is phlegmatic. He concludes that no institution is obliged to buy into the funds. He sees them as first steps in bringing institutional investors into the world of lending. The ambition is no greater than that.