Hedge funds - assets or asset strippers?

Hedge funds have come under sustained attack in The Netherlands. Henk van der Kolk, chairman of FNV Bondgenoten, the largest union in the market sector, opened the attack by accusing hedge funds and private equity funds of causing considerable unrest. “Their goal seems to be buying, splitting of companies or parts of them as quickly as possible,” he says.

Sjoerd Vollebregt, chairman of industrial group Stork, concurs with Van der Kolk. “Some just go too far. They aim at creating momentum and a quick profit on market valuations,” he says.

Stork is one of the companies targeted by the Anglo-Saxon hedge funds Paulson and Centaurus, who want it to split-up its divisions. Both venture capitalists are trying to get support from fellow-shareholders for a similar move by retailer Ahold.

Large companies, like Shell, retailer Maxeda (formerly Vendex KBB) and sugar producer CSM have also been targeted by hedge funds. Private equity firms recently paid over €23bn for Dutch companies like data supplier VNB, Philips’ semi-conductor division and the logistical part of postal provider TNT.

In response to the developments, van der Kolk has presented a seven-points plan to stop the “stripping and demolition” of businesses. He asked for a ban on speculation, and a 50/50 representation of workers and shareholders in companies’ employees’ councils, or ‘ondernemingsraden’. Van der Kolk also wants to erect a fiscal barrier to prevent a quick cashing-in after company takeovers, and a lower threshold for taking mismanagement to court.

Earlier, economic affairs’ minister Joop Wijn described venture capitalists as “a kind of greedy locusts, who empty companies”. His remarks did not go down well with his finance ministry colleague Gerrit Zalm.

The comments were “a caricature, and out of touch with reality,” Zalm said. They were “not useful for the investment climate in the Netherlands.”

The debate has prompted the pensions regulator De Nederlandsche Bank (DNB) to announce a joint survey with other central banks of the effects of hedge funds on the financial stability in Europe. Since banks are amongst the largest investors and financiers of venture capital, DNB is worried about the effect of a sharp rise in interest rates. “The rising financing by private equity has increased the risk at companies,” it says.

“Particularly in the case of a leverage buy-out, companies’ debt and susceptibility to interest rates increase. The popularity of private investments has led to intense competition amongst financiers, which has caused tension between a proper judgement of the risks and competitive pricing,” DNB says. And it has warned that “because of their investments and services to the private equity markets, pension funds, insurers and banks are exposed in several ways to risks.”

The market regulator Authority Financial Markets (AFM) has joined the debate by advising the boards of listed companies not to start discussions with activist shareholders too soon. AFM board member Paul Koster warned that they could inadvertently reveal market-sensitive information, which could compromise both themselves and their discussion partner.

Koster says he is worried about Holland’s image. “It might look as if the Netherlands is a take-over paradise for investors who can operate undisturbed,” he told the daily Het Financieele Dagblad. “But during this kind of processes, we continually approach the players for information.”

The AFM had already indicated a year ago that hedge funds’ lack of transparency is a cause for concern. “Investors don’t have enough understanding of the funds’ investment policies and risk profiles,” it warned.

Andre Olijslager, the chairman of the Dutch Association of Holding Companies, or NVP, has defended private equity investors. “By their fresh approach, holding companies provide non-core parts of companies a future. Management attention and investments for profitable activities are in the interest of all stakeholders,” he emphasised.

Olijslager pointed out that holding companies control about 1,000 Dutch companies with 400,000 employees in total. The holding companies work with €13.5bn, invested by pension funds and other large investors.

The NVP chairman announced an extension of the code of conduct of the NVP and the European Venture Capital & Private Equity Association. Jaap van Manen, professor of accountancy and a PricewaterhouseCoopers’ partner, has been appointed as the external chair of both organisations’ corporate governance committee, he said.

The NVP chair has gained support from Eumedion, the corporate governance platform of 49 large institutional investors, representing €800bn of assets. “Venture capital and hedge funds are the watchdog for company boards,” says Rients Abma, Eumedion’s director. Limiting shareholders’ rights and protective constructions are not the solution, he says. Instead, the existing rules should be refined in order to combat abuse of the system.

Abma has suggested that institutional investors in listed companies and private equity funds should keep an eye on the right strategy, by checking hedge funds and private equity funds. As potential improvements, he proposes more clarity on the identity of shareholders, a better voting infrastructure for shareholders, and a reduction in equity lending by institutional investors in case of ‘event-driven’ situations.

Eumedion argued against a further delay of the parliamentary debate on the implementation of the EU Takeover Directive. It has welcomed the moves in parliament to amend the rules regarding voting rights, among others. The directive had to come into force in May this year, but the discussions in parliament only took place in October. Meanwhile, a survey by the daily newspaper NRC has shown that Dutch pension schemes have invested around €15bn in hedge funds and private equity. The €200bn civil service scheme ABP appeared as the largest investor, with over €6bn. Number two is PMT, the industry-wide pension fund for metalworking and mechanical engineering with €1.12bn, and third is Shell Netherlands pension fund with about €1bn invested.

ABP and healthcare scheme PGGM have invested €8bn in private equity worldwide through their joint subsidiary Alpinvest. ABP’s chief investment officer, Roderick Munsters, was reported as saying in De Financiele Telegraaf. “We invest in companies for the long term, and we try to create value. We don’t invest in players who play the unilateral game of stripping and demolishing”.

According to Munsters, private equity investments has yielded €250m in extra returns for ABP annually since Alpinvest was started in 2000.

Some schemes like Horeca, the €2.4bn industry-wide pension fund for the hotel, restaurant, pub and catering industry, has declined to invest in hedge funds. The scheme’s board believes that hedge funds are not sufficiently transparent. “We just didn’t know where we would end up,” it explained.

After extensive discussions discussion with stakeholders on the effects of takeovers by venture capitalists, Wijn concluded that private equity “usually adds economic value, and is here to stay”.

However, he warned that there were risks - the risk, for example, that some activist shareholders will focus on quick profits. It should therefore be made easier for the managements of companies to know their shareholders, discuss matters with them, and involve them in the company and its long term strategy, he said. However, he again ruled out any legislation.

The public sector unions have not taken part in the discussions so far. Over two million civil servants, teachers and care workers participate mandatory in the large pension funds ABP and PGGM. Their unions, CNV Publieke Zaak and AbvaKabo FNV, are on the boards of both schemes.