When it comes to investing in private equity, Dutch pension funds are lagging behind their counterparts in other European countries. According to last year’s European Alternative Investment Strategies Survey from JP Morgan Fleming, only one-third of pension funds in the Netherlands hold private equity investments.
Ironically, those Dutch funds which do invest hold a relatively high percentage - 3.8% - of their portfolio in private equity, compared with 3.3% for Europe as a whole. Of course, the survey represents only a sample of funds – in this case, 30 funds managing €160bn-worth of assets. Those funds represented are some of the biggest in the Netherlands. Nevertheless, the anecdotal evidence is that private equity investment is less popular than in the rest of Europe, whatever the size of fund.
According to Jan Moulijn, head of marketing at AlpInvest - the private equity asset managers owned by the ABP and PGGM pension funds - the reason for this can be traced back at least 15 years. “A number of pension funds embarked on private equity investments in the late 1980s and early 1990s, investing locally,” says Moulijn. “The market was still very immature and some managers did not meet expectations. These investments continued to be part of the pension funds’ portfolios and thus private equity acquired negative connotations.” That situation has, however, been redeemed by various developments. “Over the last decade, a number of pension funds such as Shell, Mn Services, ABP and PGGM entered the market from scratch and have done very well,” says Moulijn.
Furthermore, over the past year or two, regulatory pressures on Dutch pension funds have increased, specifically relating to the issue of buffers -- the ratio between future liabilities and assets under management. Moulijn says: “Pension funds will acquire increasing liabilities over time, and they need excess performance to satisfy future demands.” And given the performance of public stock over the past few years, pension funds are inclined to look at alternatives with better return expectations.
Andrew Musters, senior investment manager with asset management company Robeco Private Equity, agrees that the need for better returns is leading to more demand for private equity. Robeco runs €500m-worth of assets under management, with several Dutch pension funds as clients. Musters says the popularity of private equity has been helped by publicity about a couple of recent deals. “Private equity deals, such as the E600m buyout of PCM– the Dutch newspaper publisher – by Apax, and retail organisation Vendex’s delisting by KKR, Permira and CinVen, have been widely reported and stimulated interest,” he says.
This upbeat outlook is confirmed by figures produced by the European Venture Capital Association. According to the EVCA, total private equity funds raised in the Netherlands in 2003 rose by 72% over the year before, from €1.2bn to €2.1bn. Investment by Dutch pension funds leapt considerably, from 2.9% of total private equity investment the previous year, to 11% in 2003.
Arianne Leuftink, partner with placement agents BerchWood Partners, says that although there is a lot of interest in private equity, many Dutch pension funds cannot get a handle on how much involvement they should have in this asset class. She says: “It is partly an educational thing. The boards of trustees of pension funds don’t understand it at all, and the directors running the pension funds don’t know how to explain it to them. Furthermore, many large funds don’t use consultants because they don’t like paying fees, so they don’t know how to define risk. But I think the situation will change.”
One thing that might act against this is cost. Some pension funds dislike what they think are disproportionate management fees for private equity investment, and want to see a better alignment of interest with those they hire to run their investments.
“I think investment in private equity by Dutch pension funds will increase,”says Moulijn. “But what they’d like to see are lower costs – the concept of carry is fine, but only if the pension fund benefits as well. One way for these funds to achieve economies might be through mixed partnerships, such as AlpInvest. This means that future costs will be brought together on one platform. Another route would be to start on an outsourcing basis using a specialist, then gradually develop an inhouse programme.”