Fund Finance 2022 Sixth Edition – Netherlands – Finance and Banking

Marion Steward

Overview

The Netherlands is widely recognised as a leading international
financial centre and has a mature investment funds industry with an
attractive investment environment due to, amongst others, flexible
corporate legislation, various tax structuring options, and an
extensive network of bilateral investment treaties and tax
treaties.

In terms of both fundraising and invested capital, 2020 and 2021
have been successful years for market participants in the
Netherlands. The most recent research conducted by the
Nederlandse Vereniging van Participatiemaatschappijen (the
Dutch Association of Private Equity Firms)1 shows that
in 2020 alone, Dutch private equity firms raised around ?6.8
billion in new funds, of which approximately ?1.6 billion in new
funds were raised by Dutch venture capitalists. In 2020, 204 Dutch
private equity or venture capital firms managed approximately ?33.8
billion (committed capital) in 454 funds, and over ?7.5 billion was
invested by national and international private equity and venture
capital firms in Dutch companies. As a consequence of growing
numbers for fundraising and private equity and venture capital
investments in the Netherlands, the Dutch fund finance practice
also enjoys increased attention, which we do not expect to decline
in 2022.

The COVID-19 pandemic did not adversely affect Dutch fund
formation and financing practice in 2020 and 2021. We have seen a
continued and significant increase in the number of fundraisings,
investor appetite and fund financings in the Netherlands.
Consequently, we are looking forward to an exciting 2022, which
will potentially provide for a great investment environment for
fund managers.

In view of the aforementioned relevance of the Dutch fund
formation and fund finance market, this chapter seeks to provide
further background on the following relevant aspects: (a) fund
formation and the most commonly used Dutch fund vehicles; (b)
regulation of fundraising and fund managers; (c) fund finance in
the Netherlands; (d) structuring the security package; and (e) the
year ahead.

Fund formation and the most commonly used Dutch fund
vehicles

A Dutch alternative investment fund (an
AIF)2 may be structured in various
ways, both as corporate and contractual entities. Corporate
entities have legal personality (rechtspersoonlijkheid),
enabling them to hold legal title to assets, and are governed by
mandatory corporate law, whereas contractual entities lack such
legal personality and are unable to hold legal title, but enjoy the
benefit of more contractual freedom. The most frequently used
corporate investment vehicles are the private limited liability
company (besloten vennootschap met beperkte
aansprakelijkheid
) and the cooperative with excluded liability
(coöperatie met uitgesloten aansprakelijkheid).
Contractual investment vehicles are most commonly established in
the form of a limited partnership (commanditaire
vennootschap
) or a mutual fund (fonds voor gemene
rekening
). The ultimate selection strongly depends on the
outcome of relevant tax and legal structuring analyses.

Regardless of whether a contractual or legal entity is selected,
an AIF established in the Netherlands should take into account that
the European Alternative Investment Fund Managers Directive
2011/61/EU (the AIFMD) is applicable and has been
implemented into the Dutch Act on Financial Supervision (Wet op
het financieel toezicht
, or the AFS).
Consequently, the AIFMD and all rules and regulations promulgated
thereunder (including Delegated Regulation (EU) 231/2013, the
Delegated Regulation) must be complied with in the
Netherlands by any alternative investment fund manager (an
AIFM), unless an AIFM can benefit from exemptions
(such as, inter alia, AIFMs managing AIFs below the
Threshold (as defined below)).

In the event that a Dutch licensed AIFM establishes an AIF as a
contractual investment vehicle (lacking legal personality), it is -
in principle – required under the AFS to also establish a
single-purpose corporate entity to hold the assets of one or more
of such AIFs set up by the licensed AIFM.

Regulation of fundraising and fund managers

The management or marketing of AIFs in the Netherlands by
‘large’ AIFMs triggers the obligation to obtain a licence
in the Netherlands, subject to certain exemptions and
grandfathering rules. AIFMs are considered ‘large’ if they,
directly or indirectly, manage portfolios of AIFs whose assets
under management amount to ?500 million or more, or – when
open-ended or leveraged – ?100 million or more (together, the
Threshold). An AIFM is deemed to manage an AIF in
the Netherlands if such AIFM is established in the Netherlands, or
if the AIF managed by it is established in the Netherlands.

Dutch AIFMs that fall below the Threshold may manage and market
their AIFs without an AIFMD licence in the Netherlands, provided
that:

  1. the AIF’s units or shares are exclusively offered to
    professional investors within the meaning of the AFS (e.g. banks,
    insurers, pension funds, brokers, AIFMs, AIFs, or qualifying large
    corporates); or

  2. the AIF’s units or shares are offered to fewer than 150
    persons, or have a nominal value of, or are offered for a
    consideration payable per investor of, at least ?100,000, provided
    that a banner or selling legend as to the AIFM’s unregulated
    status (in a predefined size and layout) is printed on the
    AIF’s offering documents; and

  3. in each case, the relevant AIFM is registered with the Dutch
    competent authority, the AFM. The aim of said registration is
    (amongst others) to ensure that the AFM can assess whether or not
    the sub-Threshold regime is legitimately relied upon, and to
    effectively monitor any build-up of systemic risks. Such Dutch
    AIFMs are required to disclose to the Dutch Central Bank (De
    Nederlandsche Bank
    ), amongst others, information on the main
    instruments in which the AIFs are trading, the principal exposures,
    and the most important concentration of the AIFs managed.

Dutch AIFMs that do not require a licence for managing and
marketing their AIFs in the Netherlands may voluntarily apply for
such licence, provided such AIFM complies with all applicable AIFMD
requirements (as implemented into Dutch law). Not many Dutch AIFMs
have chosen to apply for an AIFMD licence voluntarily.

Additionally, considering that AIFs making private equity
investments are not excluded from the scope of the venture capital
regulation (Regulation 345/2013/EC, or EuVECA),
EU-based managers of (EU) AIFs that comply with the conditions of
EuVECA may benefit from an EU marketing passport as introduced
therein. Such passport allows for the marketing of units or shares
to potential investors investing at least ?100,000 or to investors
that are treated as professional clients (within the meaning of
Directive 2014/65/EU), in each case provided that they have
confirmed their awareness of the risks associated with their
investment. Potential investors that do not otherwise qualify as
professional investors may opt to be treated as such. Both licensed
AIFMs and sub-Threshold AIFMs can benefit from EuVECA: enabling
licensed AIFMs to use the EuVECA marketing passport to also market
interests to investors that commit to invest at least ?100,000 (and
not only to professional investors as allowed under Article 32 of
the AIFMD). We see that an increasing number of (sub-Threshold)
Dutch AIFMs obtain EuVECA labels to benefit from the marketing
passport (providing market access in a transparent manner).

Finally, 2021 has also seen two new sets of European laws
entering into force that affect how AIFMs can market their AIFs to
investors. The first being Regulation (EU) 2019/2088 on
sustainability-related disclosures in the financial services sector
(the SFDR) aimed at prohibiting AIFMs from
‘greenwashing’ their product through subjecting them to
comprehensive disclosure requirements. Both licensed and
sub-Threshold AIFMs are required to satisfy the disclosure
requirements prescribed by the SFDR. The character of the
disclosures that an AIFM is required to make in respect of an AIF
depends on how such AIF is categorised (i.e. as an AIF promoting
environmental or social characteristics, an AIF having a
sustainable objective or an AIF that does none of the foregoing).
The second being a new set of rules on the cross-border marketing
of AIFs, the Cross-Border Distribution Directive (EU) 2019/1160 and
the Cross-Border Distribution Regulation (EU) 2019/1156 (together,
the Cross Border Distribution Rules). On the basis
of the Cross Border Distribution Rules, licensed AIFMs and AIFMs
managing EuVECA-labelled AIFs can now benefit, for instance, from
an EU harmonised pre-marketing regime, additional rules for
marketing to retail investors, transparency on cross-border
supervision costs and the de-notification process of AIFs marketed
under the passport. Under the framework of the Cross Border
Distribution Rules, the rules applicable to marketing
communications issued by AIFMs in respect of their AIFs are also
replaced by new, more comprehensive rules that are supplemented by
the European Securities and Markets Authority’s Guidelines on
marketing communications. Starting February 2022, qualifying
AIFMs’ marketing communications should comply with these new
requirements.

Fund finance in the Netherlands

With increasing availability of capital for investments and
demands for high returns by investors, the need for financing
solutions by Dutch AIFMs and AIFs is expected to continue its
upturn. Depending on the type of AIF, the need for financing can
vary, but is typically limited to (i) the more traditional capital
call facilities, and (ii) credit facilities to provide leverage or
liquidity for the AIF (often based on the net asset value of
investments).

There is limited data publicly available on the use of the
various types of fund financing in the Netherlands, which makes it
difficult to assess the size of the Dutch fund finance market. In
our experience, traditional secured capital call facilities
continue to be the main type of financing selected by AIFMs. It has
become customary to explicitly refer in the relevant fund
documentation to the possibility to take out this type of financing
and the creation of security by the AIF on its assets (including
receivables that investors owe to the fund). The purpose and use of
traditional capital call financings are expected to further
expand.

In addition to bridging capital calls, those financing
arrangements are also being used to ‘bridge’ the
third-party financing to be arranged for at the level of the
portfolio company (i.e. at bidco level) and thus speed up
acquisition processes.

An important consequence of incurring such leverage at the level
of a Dutch AIF is that, depending on the details of the financing,
the relevant AIFM managing such AIF may be required to obtain an
AIFMD licence in the Netherlands, as further discussed below.

Whether or not an AIF incurs leverage may affect the relevant
AIFM’s regulatory status (i.e. it may lead to a lower
Threshold being applied for purposes of determining whether an
AIFMD licence is required in the Netherlands). Additionally, if
AIFs deploy leverage, the AIFMD (and rules and regulations
promulgated thereunder) imposes additional obligations on an AIFM
managing such AIF. Consequently, incurring leverage may affect an
AIFM.

The term ‘leverage’ is defined by the AIFMD as any
method by which an AIFM increases the exposure of an AIF it
manages, whether through borrowing of cash or securities, or
leverage embedded in derivative positions, or by any other
means.

While determining whether an AIF deploys leverage within the
meaning of the AIFMD and when calculating exposure, the Delegated
Regulation dictates that AIFs should ‘look through’
corporate structures. Therefore, exposure that is included in any
financial and/or legal structures involving third parties
controlled by the relevant AIF, where those structures are
specifically set up to increase, directly or indirectly, the
exposure at the level of the AIF, should be included in the
calculation. However, for AIFs whose core investment policy is to
acquire control of non-listed companies or issuers, AIFMs should
not include in the calculation any leverage that exists at the
level of those non-listed companies and issuers, provided that the
relevant AIF does not have to bear potential losses beyond its
capital share in the respective company or issuer.

On the other hand, borrowing arrangements entered into by the
AIF are excluded under any of the abovementioned methods if these
are:

  1. temporary in nature; and

  2. fully covered by ‘capital commitments’ from investors
    (i.e. the contractual commitment of an investor to provide the AIF
    with an agreed amount of investment on demand by the AIFM).

Even though the Delegated Regulation considers in its recitals
that revolving credit facilities (RCFs) should
not be considered as being temporary in nature, it is the
prevailing view that capital call facilities (by way of an RCF or
otherwise) can be structured as being temporary in nature if
certain requirements otherwise applicable to non-RCFs are similarly
complied with. In order to structure these facilities as temporary
in nature, certain features can be implemented, such as: (i) a
mandatory clean down to occur once every 12 months (followed by a
period during which the facility is not used); or (ii) an
obligation to repay each loan, with the proceeds of capital
contributions, within 12 months of drawing such loan.

Structuring these capital call facilities as temporary in nature
typically fits their purpose, as these facilities are typically
utilised to bridge the liquidity gap at the level of the AIF to be
funded ultimately out of the proceeds of capital contributions.
Such a time gap between inflowing money from investors and
outflowing money for investments can be caused by: (a) the period,
often 10 business days, it takes before capital drawn by the AIFM
is actually contributed to the AIF; (b) the desire of the AIFM to
bundle capital calls (so as not to burden the investors with
drawdowns of smaller amounts); (c) a defaulting investor not
contributing; and (d) the AIFM delaying certain capital calls, as
this may boost the internal rate of return for investments in and
by the AIF.

Structuring the security package

Credit facilities to be granted to AIFs can be secured in a
variety of ways. For example, security may be granted over the
assets in which an AIF would (indirectly) invest. Typically,
capital call credit facilities granted to AIFs would be secured by
a right of pledge over (i) the bank account (which is considered a
receivable on the account bank under Dutch law) on which capital
contributions are made by the AIF’s investors, and (ii) all
receivables or contractual obligations that the investors owe to
the AIF, such as the right to make drawdowns from the capital
commitments. Pursuant to Dutch law, security over receivables can
be established by way of a disclosed right of pledge, or by way of
an undisclosed right of pledge.

A disclosed right of pledge is created by way of a security
agreement (or notarial deed) and notification of the right of
pledge to the relevant debtors of the secured receivables. An
undisclosed right of pledge is created either by way of a notarial
deed or by way of a security agreement that is registered with the
Dutch tax authorities for date-stamping purposes. As an undisclosed
right of pledge can only be created over present receivables and
future receivables arising from legal relationships existing at the
time of creation of such undisclosed right of pledge, it is
required to periodically file supplemental security agreements with
the Dutch tax authorities to also secure present and future
receivables resulting from legal relationships that have been
entered into after the date of the initial security agreement (or
notarial deed).With respect to creating a right of pledge over
Dutch bank accounts, the applicable general terms and conditions
are of relevance. The general terms and conditions used by most
Dutch account banks create a first-ranking right of pledge over
such bank account for the benefit of the account bank, and state
that the bank account cannot be (further) pledged. Consequently,
the cooperation of such account bank is required to create a
(first-ranking) right of pledge over a Dutch bank account. It is
becoming increasingly difficult to convince Dutch account banks to
cooperate and consent to the creation of a right of pledge over
bank accounts for the benefit of third-party lenders.

With respect to creating a right of pledge over Dutch bank
accounts, the applicable general terms and conditions are of
relevance. The general terms and conditions used by most Dutch
account banks create a first-ranking right of pledge over such bank
account for the benefit of the account bank, and state that the
bank account cannot be (further) pledged. Consequently, the
cooperation of such account bank is required to create a
(first-ranking) right of pledge over a Dutch bank account. It is
becoming increasingly difficult to convince Dutch account banks to
cooperate and consent to the creation of a right of pledge over
bank accounts for the benefit of third-party lenders.

With respect to creating a disclosed or undisclosed right of
pledge over receivables of the AIF on its investors, choosing one
form of pledge over the other depends, to some extent, on whether
it is commercially desirable to disclose the right of pledge to the
relevant investors, and whether an undisclosed right of pledge is
acceptable to the beneficiary of the right of pledge. With pledge
notices customary to be sent to investors in key jurisdictions such
as Luxembourg, the United Kingdom and the United States, it is
becoming more common to notify investors of a right of pledge over
the investor receivables in the Netherlands as well. Dutch law
allows for sufficient flexibility as to the form of such
notification to be made; consequently, such notification can be
made by uploading the notice to the AIF’s investor portal,
making the process of serving notice a fairly effortless
procedure.

With respect to creating an undisclosed right of pledge over
capital commitments in particular, the question is whether the
receivable owed by the investor to the AIF with respect to payment
of the capital commitments qualifies as a current receivable, as a
future receivable arising from an existing legal relationship, or
as an absolute future receivable.

If it must be held that the legal relationship, and thus the
receivable arising out of that legal relationship, only comes into
existence once the AIFM sends the capital call notice to the
relevant investor, then the receivable is an absolute future
receivable. This means that, prior to the moment that the AIFM has
sent the capital call notice, only a disclosed right of pledge can
be created over this receivable. In Dutch literature and case law,
the prevailing view is that the receivable owed by the investor to
the AIF qualifies as a future receivable arising from an existing
legal relationship, which receivable comes into existence once the
AIFM sends the relevant capital call notice to the relevant
investor and can also be made subject to an undisclosed right of
pledge. However, if the AIFM sends the capital call notice after
the pledgor’s (the AIF’s) bankruptcy, then the receivable
comes into existence after such pledgor’s bankruptcy and
therefore forms part of the pledgor’s bankruptcy estate
unencumbered by any right of pledge. To overcome this potential
problem, a provision could be included in the fund documentation,
stating that the parties acknowledge and agree that the receivable
arising out of the right to make drawdowns from the capital
commitments comes into existence once the fund documentation is
entered into and thus constitutes an existing but conditional
claim; conditional upon the capital call being made. A right of
pledge created over an existing but conditional receivable is also
valid if the condition (the capital call) is met after the
pledgor’s bankruptcy.

However, there is no statutory law or limited case law
confirming that such a provision would work to avoid any of the
aforementioned issues. To mitigate this risk, the pledgee may
request to be granted a direct, independent right to issue capital
call notices in default situations. Often, such direct agreement is
not (commercially) feasible. Nowadays, we see that fund
documentation caters for the possibility for the pledgee to make
capital calls by submitting drawdown notices (to avoid the need to
arrange this at a later stage via direct agreements, which is often
practically and commercially not feasible). Alternatively, the AIFM
may grant a power of attorney to the pledgee to issue, in certain
default situations, a capital call notice in the AIFM’s name to
the investors (again, this right is often acknowledged in the fund
documentation). However, as a power of attorney is cancelled in the
event of bankruptcy of the entity that has granted the power of
attorney, the latter option is less favourable to the pledgee.

The pledgee should consider that, in relation to an undisclosed
right of pledge, it may only collect on a receivable after the
debtor has been notified of such right of pledge. Until
notification has been made, the pledgor remains authorised to
collect payments and the debtor of the relevant receivable remains
authorised to pay to the pledgor.

Both the pledgor and pledgee may notify the debtors. However,
unless the pledgor and pledgee have otherwise agreed, the pledgee
may only notify the debtors if the pledgor or debtor of the secured
claim has failed to, or the pledgee has good reason to believe that
the pledgor or debtor of the secured claim will fail to, (properly)
perform its obligations owed towards the pledgee.

Another element to take into consideration when structuring the
security over the AIF’s assets is that receivables and
contractual rights may, through a clause in (the general conditions
to) the contract from which such receivables or contractual rights
arise, be made non-assignable/transferable or
‘non-pledgeable’. Depending on the wording of the relevant
provision of the contract, such non-assignability clause could have
an effect in rem, in which case creating a right of pledge over
such receivable or right will simply not be possible. The fund
documentation should be carefully checked on this.

The year ahead

As emphasised, 2020 and 2021 have been interesting and important
years for Dutch fund formation and fund finance markets. With
current national and international political developments
confirming and strengthening the Netherlands’ position as a
mature and well-equipped jurisdiction for funds and investments, we
expect that 2022 will be another important year for the Dutch
private equity and venture capital markets. With the Dutch fund
finance markets maturing, we expect to see an increase in the
diversity and volume of the fund finance products offered in the
Netherlands; for example, by an increase in the number of hybrid
facilities, general partner solutions and co-investment facilities
offered. In view of, amongst other things, the evolving legislation
in this respect (such as the SFDR), a key development will likely
be the integration of ESG factors in fund facilities, whereby
measurable ESG performance indicators can directly impact the
applicable interest margin.

Footnotes

1 An interactive graphic providing an overview of the
NVP’s findings can be found on its website:
https://nvp.nl/feiten-cijfers/marktcijfers/ (this reference is
accurate on the date of this publication).

2 We note that this chapter does not focus on collective
investment undertakings that require a licence pursuant to Article
5 of Directive 2009/65/EC (UCITS).

Originally published by Global Legal Insights.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

https://www.mondaq.com/fund-management-reits/1162162/fund-finance-2022-sixth-edition–netherlands

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