NETHERLANDS - The effect of private equity investors and hedge funds on the Dutch economy and companies are modestly positive on average, researchers from Erasmus University have claimed.
"Private equity investors seeking to make a quick profit without creating added value are rare, while activist hedge funds count for no more than 5% of their sector," they stated in a report - requested by the Dutch parliament - on the activities and effects of this category of investors.
The study was produced on the back of a debate within Dutch society, sparked by activist hedge funds and recent large takeovers by private equity investors. Both groups of investors drew wide criticism on the forced break-up of ABN Amro, and the still ongoing effort to split-up industrial conglomerate Stork. The previous Finance minister Joop Wijn likened such firms to "locusts".
According to the researchers - who looked at earlier studies and concrete cases, as well as surveying Dutch listed companies - an international approach will be the most effective to tackle negative effects of the activities of hedge funds and private equity investors.
At the same time, researchers recommended increased supervision could be applied to hedge fund through their credit lenders, who should demand adequate credit conditions and transparency. But ‘empty voting' via securities-lending should also be discouraged, they stressed.
On a national level, measures to strengthen transparency, in takeovers by private equity investors, are the most effective against negative effects, the researchers stated, while also proposed a limited tax-deductibility of an artificial interest burden.
The Erasmus researchers could not draw unequivocal conclusions on the effects of private equity investors and hedge funds on economic financial stability. In case of leveraged buy-outs, the risks are mainly caused by the exposure to key institutions, such as large international merchant banks, they said.
"However, the changed market situation for financing has already resulted in an increased credit discipline," the scientists noted.
To prevent giving hedge funds a decisive say in a company's activities, the government has recently decided stakeholders owning 30% of a company's shares must bid for the remaining equity.
In June, the cabinet announced a lowering of the reporting threshold of share ownership from 5% to 3%.
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