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James Williams, Hedgeweek

The Netherlands: all the right ingredients


The Netherlands is home to Europe's oldest stock exchange, the Amsterdam Stock Exchange, first established back in 1602. According to the latest IMF report, its financial system has assets nearly eight times GDP with the largest three banks accounting for 72 per cent of the sector's assets. They are: ING Bank NV, Coöperatieve Rabobank UA, and ABN AMRO Bank NV.

The country is home to 16.8 million people, it has a stable political and economic climate and in terms of location, Amsterdam is less than one hour from London, Frankfurt and Paris.

According to the World Economic Forum, The Netherlands is the fourth most competitive economy in the world and is the most competitive country in the European Union. The Netherlands has attracted international businesses with its world-class infrastructure, excellent higher education system and a well-functioning government. 

"We have a multi-lingual, well-educated workforce and a high number of good service providers," comments Sicco Plesman, Managing Director, KAS Trust & Depositary Services BV, a subsidiary of KAS Bank. "We also have fund structures that are very flexible and cost-efficient. In my view, there are numerous attractive benefits when thinking about The Netherlands."

Even though it isn't in the spotlight as much as Luxembourg or Ireland, Holland's rich history as a trading centre makes it naturally predisposed to supporting active fund managers. This is reflected by the fact that the Dutch regulator, the Authority for the Financial Markets (`Autoriteit Financiële Markten' or `AFM') is progressive, approachable and willing to work with fund managers, not burden them unnecessarily. 

"The Dutch market is highly respected," says Gildas le Treut, Global Director Prime, ABN AMRO Clearing. "We never field any questions from clients on whether it is the right jurisdiction. It might be a little complex to understand structures such as the FGR, (fund for joint account) but people do not have to question whether the Netherlands is of a high enough quality. It is well thought of."

The Netherlands does not have as long a heritage as Luxembourg, in terms of being a fund jurisdiction. In the old days there were lots of funds in the Netherlands but 15 or 20 years ago, Luxembourg started to gain a relative advantage for a number of reasons. 

As Marc van Campen, Attorney at law/tax advisor, Van Campen Liem, a Dutch law firm, says: "Open-ended funds left the Netherlands as Luxembourg was viewed as being more interesting; it set the tone under the UCITS regime. However, what we have been seeing over the last few years is a gradual increase in the number of people considering the Netherlands for structuring a range of funds; hedge funds as well as private equity and venture capital funds."

AIFMD & Brexit

In the current environment, there has been a lot of consolidation among hedge fund companies and larger asset managers. This has led to spin-off activity, with respect to both proprietary trading firms and big asset managers. Those spin-offs are typically single managers who are using their expertise to set up new hedge funds.

With the UK now opting to leave the EU, start-up managers – be they hedge, private equity, long-only – are having to weigh up their options and determine where to set up their funds. Many will look to operate their management companies out of London, naturally, but with the UK set to become a third country under the AIFM Directive, it means that managers will no longer be automatically eligible, as UK authorised AIFMs, to passport their funds across Europe. 

The situation is complex, as there are a lot of known unknowns, but with the Netherlands so close to the UK, and with English spoken predominantly across the country, it could become a very attractive option for both start-up managers and established managers who need to rely on the passporting rights under the Directive. 

Saemor Capital is a specialist in quantitative investment management. With more than USD500 million in AUM, Saemor is the second largest hedge fund manager in The Netherlands and is AIFMD-regulated. 

Discussing the ease with which start-up managers can get their alternative fund businesses up and running in Holland, Sven Bouman, CEO and founder of Saemor Capital says that it is "relatively easy to set up a new company in The Netherlands and the business climate is very strong". 

"Setting up a fund has become more complicated since the introduction of AIFMD," says Bouman. "Every manager on the continent has to cope with this, especially launching a cross-border fund and dealing with multiple regulators. Our hope is that in the future there will be more regulatory synchronisation in Europe."

Wilrik Sinia is co-founder of the Amsterdam-based hedge fund manager, Mint Tower Capital, whose flagship Mint Tower Arbitrage Fund focuses on convertible and volatility arbitrage. Prior to establishing Mint Tower in 2010, Sinia and Mint Tower's three other co-founders were part of the management team at Principal Strategies, ABN AMRO bank's proprietary trading desk. 

Sinia confirms that it was easier to set up under the old regime, prior to AIFMD, without having to worry about the costs of regulation. Now, with the leverage rules under AIFMD, the regulator looks at the aggregate AUM of the manager; anything over EUR100 million, with leverage, and the manager comes under the full scope of the Directive.

"For a fund like ours that trades heavily, it would be harder to get up and running and stay out of the full scope of the Directive. Saying that, the landscape is still pretty good here, in general, for setting up AIFs because the legal costs tend to be less expensive compared to other EU jurisdictions. 

"Creating prospectuses, setting up your legal structure and so on, there is normally a cost benefit compared to Ireland and Luxembourg," comments Sinia.

For those managers who need to be regulated, they will need to ensure they have enough working capital. "I would say the minimum size for an independent shop has risen," adds Sinia.

De Minimis light regime

To support de minimis managers who don't use much leverage and are below the EU100 million threshold, the Dutch regulator introduced a light regime. This allows a start-up manager to register with the AMF and is attractive to those based inside or outside the Netherlands, due to the lower costs involved. In the case of a foreign manager, a management company will need to be incorporated in the Netherlands, which will act as the Dutch AIFM. 

If you are a non-EU manager, no matter your size, if you market into the EU you will have to register with the local regulator in each market.

Currently, a UK de minimis manager wanting to use the Dutch regulatory environment will need a Dutch management company and, crucially, convince the AFM that there is sufficient substance in place; i.e. there are people on the ground, say operations people, working for the AIFM. It cannot be a boilerplate arrangement.

"For some regulatory regimes, the regulator will not be impressed if it finds out that none of the key people within the AIFM are locally based and that all the functions are being outsourced back to the UK. That goes to the analysis of whether the Dutch AIFM is in fact the manager," says Maurits Tausk, Partner and Attorney at law, Van Campen Liem. 

Post Brexit

After Brexit, however, the UK will become a third country and different rules will apply to UK managers active in the Netherlands. A UK manager could use the regime of Article 42 of the AIFMD to market to Dutch investors. They could also set up an office in Holland, try to obtain an AIFM license, and then outsource certain functions back to the UK, using the license to passport their fund(s) across the EU. 

The latter arrangement is something that the European Securities and Markets Authority (ESMA) is likely to keep a close eye on.

"They are concerned that the licensed AIFM must be able to perform the proper level of investment management functions. The rules of AIFMD also require that the AIFM monitors the activities of the delegate in the UK. This highlights the legal/political developments over this issue of regulatory substance," confirms Tausk.

Does it present an opportunity for the Netherlands? Tausk thinks it's too early to say: "The mood music across parts of the EU is that fund managers are being expected to set up management companies in the country they reside in. The advantage for us is we are regarded as a sensible jurisdiction and we have a predictable legal climate. That aspect is gaining importance in the same way the other aspect, regulatory substance, is gaining importance."

As one of the more established and longer running managers, Saemor Capital's Bouman has been pleased to see the growth in startups in The Netherlands. "We have a strong regulatory environment, which could benefit from Brexit as it offers a viable European onshore jurisdiction for managers," he says.

EuVECA gaining traction

Van Campen notes that one area that is slowly gaining traction is the European Venture Capital Fund (EuVECA) Regulation. This presents a compelling alternative option to start-up managers who may not wish to get embroiled in AIFMD. A manager can opt to get approved by the AFM, allowing them to market across Europe without having to become a fully licensed manager. 

"Our experience is that there is increased interest for a Dutch EuVECA label. The goal is to obtain EuVECA approval from the AFM and as a sub-threshold, non-licensed AIFM, still get the passporting rights to market your fund. It's basically a special regime for the cross-border marketing of funds by de minimis managers," explains van Campen.

He says that this is a compelling option for European managers with sufficient Dutch presence, with interest coming from managers in Italy, Spain and Eastern Europe, but less so from the UK. "I think the reason UK managers don't consider this is because they talk to UK advisers, and they typically tell them to set up vehicles in the UK or Channel Islands. They are protecting their own business interests," says van Campen.

Infrastructure

Anyone considering a fund jurisdiction needs to have complete confidence in the depth, breadth and quality of service providers. In that regard, the Netherlands stacks up well. As alluded to earlier, it has a robust network of banks that have, for many years, supported Dutch pension plans. This is no different for fund administrators and depositaries, of which there are many to chose from, such as TMF Depositary NV, KAS Bank, etc. 

"There is a bit of a business hub in Amsterdam when it comes to HFT firms, derivatives trading; it is a bit of a niche here so the service provider infrastructure is pretty good for trading strategies. There are a lot of pension assets here in Amsterdam so when it comes to asset servicing, I don't see any drawbacks to setting up funds here," suggests Sinia.

Holland has a strong service provider infrastructure because it has always had a large and innovative financial sector.

"We work with recognised international service providers, who have local offices. Where we require specialised local knowledge, we work with local partners. For example we have been working with a compliance consultant in the Netherlands, Charco & Dique, who have developed a comprehensive compliance system, Ruler," confirms Bouman.

Aside from the depositary, arguably one of the most important relationships to establish for alternative fund managers is the prime broker. Leading the way in Holland as a truly specialised prime broker is ABN AMRO Clearing. 

Discussing what ABN AMRO Clearing considers before working with a new client, Delphine Amzallag, European Head of Relationship Management Prime, says that, ultimately, the manager has to be a good fit and must have a viable strategy. 

"Does the client fit within our parameters and can we service them in the most effective way? Are we able to offer all the markets and services they require? These are all important considerations. In addition, we would always look at the client's fund financials and the associated ROE," says Amzallag, who continues: 

"We also consider the counterparties and domicile that the manager has chosen under AIFMD. If they are located in jurisdictions that we don't have existing connections with, we will need to take time getting comfortable that these counterparties are viable and reputable. 

"We would never bring on board a client that we don't feel completely comfortable working with in terms of their trading strategy and the counterparties that support them."

The fact that ABN AMRO Clearing provides most clients with leverage (most strategies on its books are trading-focused strategies) means that it is taking on risk. Not only that but it is, says le Treut, a significant investment to onboard each client, in terms of getting all the connections in place, doing all the KYC and due diligence checks, etc.

"We don't want to waste anyone's time. We primarily work with clients we believe we can help grow and succeed going forward. Being focused, people know what we are good at," says le Treut.

Raising capital 

Like other jurisdiction, raising capital in the Netherlands remains a challenge. Le Treut confirms that whilst there is still a lot of interest in hedge funds among the big Dutch pension plans, regulations, heavy due diligence, general low performance, pressure on fees mean that there is limited appetite to invest into smaller and emerging managers despite their performance. 

"Most allocations from the large pension funds go to the largest hedge fund managers with long track records. Very few assets go to smaller managers, even though their performance in recent times has been better. That said, these managers are still getting substantial allocations from Dutch family offices," says le Treut. 

Each year, ABN AMRO Clearing hosts the popular Amsterdam Investor Forum with 250+ experts from the alternative investment community. Now in its seventh year – the next event takes place on 6th and 7th March 2018 at the bank's headquarters – it gives hedge fund managers the opportunity to debate on key industry topics and connect with institutional investors, allocators, FoHFs and Family Offices, as well as hedge fund consultants.

Indirectly, this serves as a great way for managers to pitch their investment ideas and raise their profile towards potential investors "Over the years, the Amsterdam Investor Forum has become a major industry event in Europe and we are very proud of such a success and how it has helped our clients so far," says le Treut.

Legal structures

Depending on whether the manger wants a fund with or without legal personality, there are various structuring options available in the Netherlands. Those with legal personality include the limited liability company (BV or NV) and the cooperative. The BV is a private company with limited liability whilst the NV is a public company with limited liability. 

According to the Law Reviews*, the BV provides more flexibility than the NV, with respect to such things as its share capital, criteria for distributions to shareholders and voting rights. More stringent capital protection restrictions also apply to NVs. On the other hand, shares in a NV can be included in the Dutch giro system (and as a result be listed on for example Euronext Amsterdam), while the shares in a BV – given that it is a private and non-listed company – cannot be included in the Dutch giro system.

Another structural option to consider is a Dutch cooperative. Although the cooperative is a legal entity, it shares some characteristics with partnerships. There are no minimum capital requirements for a cooperative and its capital may be expressed in a currency other than the euro.

"Just recently, the Netherlands came out with proposed new tax legislation on how to deal with withholding tax for cooperations. We need to see over the next few months how that plays out," says van Campen.

Most people looking to set up a Dutch AIF will typically choose a structure without legal personality. These include the limited partnership called the commanditaire vennootschap (`CV'), often used for those thinking of setting up a closed-ended fund for PERE investments, and the fund for joint account (FGR). 

The CV can be structured as a tax opaque or tax transparent vehicle. However, the key drawback in the Netherlands is that in order to be tax transparent, the transference of an LP interest requires approval by all LPs.

For funds that have a lot of investors, that is a bit of a nuisance. It's a restriction that not all people are happy with, says van Campen.

"We do see people still using the CV, sometimes with a cooperative below it; in other words, the partnership invests in cooperatives for various investment deals. That's quite common and we are working on a few of those now. In other cases, we can work with a Dutch cooperative as the primary fund vehicle. A cooperative is a separate legal entity and a little more flexible than a BV, and sometimes a little more tax efficient," explains van Campen.

FGR

KAS Trust's Plesman says that the most common fund structure for open-ended investment funds is the FGR. 

One of the advantages of an FGR is that it is formed by contractual agreement rather than by a deed of incorporation in front of a notary, which means the process is quicker and more cost-efficient. It will behave as a separate entity that holds the assets of the fund separate from those of the investment manager, making it a safe structure. This compares to closed-ended funds they will typically use a CV structure, whereby the fund holds the assets and is the legal entity that the manager (GP) interacts with. 

Owing to its unique nature, for those wishing to sell an FGR fund abroad they will likely be asked questions on how the contractual arrangement works, who are the parties involved, etc. "But if you are able to explain it, you will have a flexible and cost-efficient structure if you compare it with other EU jurisdictions," says Plesman.

Most foreign investors don't understand the FGR. 

"They sometimes ask why we don't use a US legal partnership or a SICAV because these are structures they understand," remarks one manager. "We always need a few weeks extra if we start trading with a US counterparty, for example, as it takes them time to sit back and understand what it is they are being confronted with. What is the contract like? How does it work? It wastes time and resources having to explain something that is never going to be an accepted structure, globally."

For that very reason, Amzallag says it is important that Dutch service providers can clearly explain the nuances of the FGR to reassure investors and managers. "There is a lot of education that goes into it; something we've seen extensively over the last few years. It doesn't stop people using the FGR, it just slows the time to investment while a manager gets familiar with the structure and receives the necessary legal counsel. 

"I have never seen anyone shy away from the structure as such. These funds are marketing themselves more and more, so the level of understanding is improving, especially in Europe." 

Mint Tower uses such an FGR. In Sinia's view, it is the one area that needs changing in Holland. 

Legally it is a sound structure and doesn't have a lot risks, per se, but as Sinia points out: "It is an unknown structure and it is very hard to change structures once you've established an FGR. I think the biggest step that could be taken is to create a variation of the Dutch NV. It is a very well protected, well-constructed legal structure for public companies. If we could come up with something similar for Dutch funds that would be beneficial. 

"Investors want well known solid structures and it would be much better to have an NV equivalent as the standard fund structure."

With the FGR, a foundation holds the assets, then you have the investment manager, a custodian and other counterparties and everyone forms the contract together with the investors. 

"The Dutch FGR structure definitely needs better promotion," suggests Bouman. "The structure is equivalent to that of a Luxembourg FCP, Irish CCF and UK PFPV. However, it takes time to explain the similarities and this can be a hurdle. Many investors do not have the time or the inclination to understand the structure, which is tax efficient and works well as an European onshore structure." 

In many ways, Bouman thinks it would be for helpful for investors to have a homogenous structure that is equivalent across the different jurisdictions. "This is one of the reasons that we are working with a partner on a SICAV (UCITS) solution, which investors know well and have shown a preference for," he confirms.

Things to improve

Looking ahead, there are two areas that Holland could look to improve as a jurisdiction, both of which are tax-related. 

The first relates to Dutch limited partnerships. If these could be treated as tax transparent, whereby the admission or substitution of an LP only requires the approval of the GP – or a limited number of LPs – instead of all LPs, it would make life much easier. 

"Secondly, which we'll see over the next few months, is whether the Netherlands will allow Dutch funds structured as cooperatives to be used for PE and VC, and allow them to distribute fund distributions without any dividend withholding taxes. If that was allowed, I think we would start to become an even more attractive fund jurisdiction," concludes van Campen. 
 


*Sources: http://thelawreviews.co.uk/edition/the-asset-management-review-edition-5...

 

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