Private equity: fundraising in Netherlands

This article is an extract from Lexology In-Depth: Private Equity - Edition 13. Click here for the full guide.

I Introduction

Fundraising has generally excelled in the past few years, with €10.1 billion being raised in 2022 by private equity (PE) fund managers in the Netherlands;² however, 2022 marked a shift in the Dutch market for PE fundraising ventures that continued into 2023. Although the data for 2023 is not yet available, the numbers are expected to be lower owing to the economic downturn and geopolitical climate.

In addition to changes in the economic climate, allocation restrictions are expected to limit further growth in funding and continue to affect the fundraising market in 2024 and beyond. Many PE managers still have 'dry powder' (committed capital that has not yet been invested) in existing fund structures, leading to the expectation that fundraising will remain difficult until the market for investing becomes more attractive again. It is expected that certain fundraising ventures will still go ahead, with more focus expected on relatively new pool of limited partners (namely, family offices and high net worth individuals). Retail investor inflow is continuing to attract interest as well.

The good news is that the economic downturn had a limited effect on the biggest fundraising ventures in the market as managers accelerated their fundraising efforts when the economic climate began shifting. This led to more pressure to complete fundraising ventures that started in 2022 and were completed in 2023. This approach has met with success. It would appear that there has not been recourse to any significant compromises to target size or hard caps.

Overall, fundraising results were not affected, especially for the largest managers, which typically sought to raise record-breaking numbers: up to multiple billion euros per fund. In fact, some managers tapped into double fundraising – in which a new flagship fund and a speciality fund are raised simultaneously. The fundraising targets vary highly, with the biggest PE fund managers in the Netherlands raising funds with a target size of €4 billion, whereas smaller firms tend to target much lower amounts. Fundraising results in the past 12 months show that investors continue to back well-established managers and flagship strategies.

The Dutch market has also seen an increase in continuation funds and general partner (GP)-led transactions. Although these types of transactions are not new (there are various precedents for 'recapitalisations' that are structurally equivalent), continuation funds are now seen as a real exit alternative. In 2023, these transactions were typically initiated for the 'crown jewels' of a fund. This demonstrates a significant contrast to when continuation funds tended to be associated with underperforming assets some years ago.

Fundraising timelines

In terms of timing, fundraising has a few select phases that must be taken into account and that dictate the overall timing of a fundraising process. The timelines from the start of the fundraising until final closing are typically between 18 and 24 months.

Phase I: Preparatory phase and market sounding (around three months)

In this phase, a manager considers the structuring of a potential new fund in view of optimising it for its own purposes as well as for the investor's. The structure could thereafter be tested for soundness if there is sufficient investor appetite or if changes to the fund documents are required to ensure that fundraising goes smoothly. This may be done via a placement agent or directly by the manager. Pre-marketing requires a notification with the home state regulator of a European Economic Area (EEA) manager.

Phase II: Filing of documentation with the Dutch Authority for the Financial Markets (around two months)

Once documents are finalised and a manager wishes to formally file the fund for registration under the Directive 2011/61/EU³ (the Alternative Investment Fund Managers Directive (AIFMD)) for a management licence for marketing with the regulator, the Dutch Authority for the Financial Markets (AFM) has one month to review the documentation. A one-month extension is possible (and is actually the norm in market practice). If the AFM requires more information, the overall review period may be suspended. Registrations are usually finalised within two to three months.

Phase III: Marketing phase (around 14 months until final closing)

Once a fund is registered, the manager may market it to professional investors throughout the EEA and may also accept binding commitments from these investors. At this point, the most intensive time in terms of legal negotiations starts.

Fund documents in general include a fixed term for fundraising ventures (the time between the fund's first closing and final closing), which ranges from 12 to 18 months. An extension typically requires an amendment of the limited partnership agreement (LPA) and the approval of the limited partner advisory committee or a majority of investor interests. In the current economic climate, managers may consider setting the fundraising term more towards the 18-month mark to buy some time to complete the fundraising.

II Year in review

Despite the economic climate remaining challenging, there were some successful fundraising ventures for Dutch managers during 2023. Early in the year, Waterland Private Equity Investments (Waterland) announced the closing of its ninth institutional flagship fund, Waterland Private Equity Fund IX (WPEF IX), at €3.5 billion. Simultaneously, Waterland also closed its first Waterland Partnership Fund I (WPF I) at €500 million. WPF I is the first fund under Waterland's management that focuses on minority investments in a select number of Waterland portfolio companies when these are exited. Both funds closed at their respective hard cap and were oversubscribed.

DIF Management BV (DIF), a Dutch private infrastructure equity manager, raised the final rounds of capital for its funds DIF Infrastructure VII, with a final closing at €4.4 billion, and DIF Core-Plus Infrastructure III, with a final closing at €1.6 billion.

III Legal framework for fundraising

i Possible legal forms and considerations

The main considerations to be taken into account when structuring PE funds are (1) the preferred tax status of the fund, (2) the limited liability of investors and (3) the flexibility of the fund's terms (whether the legal form leaves sufficient room to tailor the fund to the manager's intended strategy).

In the Netherlands, PE alternative investment funds (AIFs) are generally structured as a limited partnership (CV) or as a cooperative with excluded liability (cooperative). Contractual funds for joint account are often seen in the broader fund market but do not fit well into the PE asset class due to their mandatory passive purpose (solely investing, whereas PE management also requires active management of entities).⁴

Limited partnerships

A CV is a limited partnership between one or more GPs with unlimited liability and one or more limited partners with limited liability. As a CV, there is no separate legal personality, and the assets of the fund cannot be held by the CV itself. Instead, the assets are legally held by a title holder for and on behalf of the fund. Investors participate as limited partners in a CV and receive a limited partnership interest. Under Dutch law, there is much flexibility with the terms and conditions to be included in the LPA of the CV.

The limited partners of a CV are no liable, in principle, for the obligations of the CV with regard to third parties, unless the names of the limited partners (or any portions) are used in the name of the CV, or if the limited partners perform any acts of management or control of the fund. A CV can be structured as tax transparent for Dutch tax purposes (see Section IV.iv, below).

For tax reasons, CVs operating as PE funds do not directly hold their interests in portfolio companies but through a Dutch cooperative.

Cooperatives

A cooperative is an entity with legal personality. Investors participate in a cooperative as members, and the fund's terms and conditions typically are set down in a members' agreement. Investors receive a membership interest in the cooperative. A cooperative does not have a capital divided into shares. Under Dutch law, the articles of association can limit or exclude member liability. The name of the cooperative needs to indicate the level of liability of members. In an investment fund context, a cooperative with excluded liability is most common. A cooperative is opaque for Dutch tax purposes.

ii Key legal terms

Although terms as included in fund documentation vary and are included on the basis of commercial strategising by managers, there are a number of topics that are generally dealt with in fund documentation, irrespective of the fund type or legal form. The table below lists the main negotiated terms, with our comments on what the authors consider to be market practice.

Negotiated terms and associated market practice

iii Disclosure obligations

When marketing an AIF to professional investors in the Netherlands, Dutch licensed fund managers need to provide investors with a private placement memorandum, including the disclosures required, pursuant to Article 23 of the AIFMD. Additional rules apply if a manager markets to retail investors (see Section IV.ii, below).

In respect of marketing communications, as a general rule, managers must ensure that marketing communications are clear, fair and not misleading. Moreover, as from 2022, the marketing communications should be in line with the requirements of the European Securities and Markets Authority guidelines on marketing communications.

iv Marketing

Dutch licensed fund managers can market their funds to professional investors in other EU Member States if a marketing passport – as referred to in the Dutch implementation of Article 32 of the AIFMD – is obtained. An AIF can also be pre-marketed in the Netherlands and other EU Member States if the manager has notified the AFM and the conditions as set out in Article 30a of the AIFMD are met.

Non-EU fund managers that wish to market their AIFs in the Netherlands need to comply with the Dutch implementation of Article 42 of the AIFMD and the national private placement regime (NPPR). To make use of the NPPR, a number of conditions apply, such as the competent regulatory authority of the non-EU manager and the AFM must have entered into a memorandum of understanding, and an attestation from the home state regulator must have been obtained, among other things.

As from Q1 2023, the AFM requires that a non-EU manager that has onboarded a Dutch investor pursuant to the NPPR also provides the AIFMD Annex IV reporting to the AFM and the Dutch Central Bank (DNB). The frequency of the reporting varies depending on the characteristics of the manager and the fund. This requirement is not new but, until 2023, the AFM and the DNB had not indicated that they would not enforce reporting obligations.

v Scope of fiduciary duties

Under the AIFMD and Dutch law, Dutch managers are required to (1) act in the best interests of the fund and its investors and (2) treat investors in a fair and equal manner. Although unequal treatment is allowed if disclosed to other investors (subject to the conditions as set out in the AIFMD), unequal treatment may never result in a disadvantage to other investors and will need to be substantiated on the basis of objective qualifiers (why a manager finds it appropriate to treat investors differently, for instance). Objective qualifiers could be ticket-size or investor-specific legal, regulatory or reporting requirements.

In addition, one of the core tenets of Dutch contract law is the principle of reasonableness and fairness. This principle requires parties to an agreement to act in accordance with what is reasonable and fair. All contracts, including agreements governing CVs or other types of fund agreements, need to be interpreted in accordance with this principle. This does not mean that express contractual terms may be set aside easily; on the basis of case law, this is allowed only in exceptional situations in which the enforcement of a contractual provision would lead to an unacceptable outcome.

IV Regulation

i Involved regulators and scope of supervision

The AFM is the primary supervisor for investment fund managers that are licensed or registered in the Netherlands. The AFM is responsible for the initial licensing process and ongoing supervision in terms of conduct and compliance. The DNB oversees prudential supervision aspects.

In line with the AIFMD and similar legislation, it is the manager that is regulated and not the fund itself. Upon setting up a new fund, the manager is required to register the fund under its licence in order to be able to market it (for more detail about the fundraising process, see above).

ii Available regulatory regimes for PE managers

There are three regulatory regimes available for PE fund managers in the Netherlands: the AIFMD, European venture capital funds (EuVECAs) and European long-term investment funds (ELTIFs) regimes.⁵

Alternative Investment Fund Managers Directive

The AIFMD has been fully implemented in the Netherlands without any noteworthy 'gold-plating'.⁶ Managers can market their funds to professional investors throughout the EEA if they have a licence from their local regulator (also called the AIFMD passporting regime). Only the manager is subject to home state supervision. Where a fund is marketed to other jurisdictions, those relevant jurisdictions should not impose additional requirements.

The harmonised passporting regime applies only to marketing aimed at (1) professional investors or (2) non-professional investors that are treated as professional investors at their request (known as an 'opt-up'). For marketing to retail investors that do not meet the opt-up criteria in the EEA, national top-up requirements apply to the extent that national law allows retail marketing. A retail top-up regime applies in the Netherlands, which imposes additional disclosure, reporting and compliance requirements (based on the requirements for undertakings for collective investment in transferable securities).

Dutch law has an exemption from the fully fledged retail top-up regime. If a PE fund is open only for investment amounts with an initial value of at least €100,000, the Dutch retail top-up rules do not apply. The rationale is that an investor that contributes at least €100,000 is deemed to be sufficiently professional and does not need the benefit of additional investor protection as well as the retail top-up requirements. The tricky element here is that the Dutch regulator seems to find a commitment of at least €100,000 insufficient. To qualify for the lighter regime, the amount will have to be called at once, but only amounts used for investment count as contributed capital for economic purposes.

European venture capital funds

The European Venture Capital Fund Regulation⁷ allows venture capital managers to distribute their funds more easily. EuVECA funds can be marketed to both professional investors and retail investors that (1) make a minimum investment of €100,000 and (2) state in writing that they are aware of the risk associated with the investment in the fund. To qualify as a EuVECA fund, a fund must – among other criteria – intend to invest at least 70 per cent of its committed capital in a variety of qualifying investments, including equity or quasi-equity-like instruments, secured or unsecured loans granted to a portfolio company, or interests in other EuVECA funds, subject to certain thresholds.

European long-term investment funds

The ELTIF regulatory framework offers managers the opportunity to offer the funds they manage under the ELTIF label. An ELTIF has a passport for marketing to both professional and retail investors in the European Union. Consequently, it may attract a wider pool of investors than a typical closed-ended PE fund would. To qualify as an ELTIF, managers must meet certain conditions relating to eligible assets in which the ELTIF invests and the use of leverage and derivatives.

Owing to the strict portfolio composition rules under the previous regime, the ELTIF was not a great success; however, the revised ELTIF framework (ELTIF 2.0) came into effect as of 10 January 2024. ELTIF 2.0 introduces some important changes to the previous regime to make the ELTIF a more attractive alternative for sponsors that could benefit the 'retailisation' (the opening up of PE to non-professional investors) of the PE industry. Key changes include the following:

1. indirect investments in minority holdings are also eligible to qualify towards compliance with diversification rules;
2. the minimum investment threshold in qualifying assets is lowered to 55 per cent, allowing more room for significant illiquid investments;
3. no separate suitability test is required in addition to the MiFID II⁸ suitability test;⁹
4. territorial restrictions on investments have been largely removed, as have the requirements for an investment to produce economic or social benefits; and
5. the allowed loan to value (LTV) for retail ELTIFs is increased to 50 per cent, with outstanding capital commitments from investors deducted from the loan amount for LTV calculations.

Overall, the applicable regime when offering an ELTIF to retail has become less stringent than under the previous ELTIF regime. It remains to be seen whether the ELTIF will become a viable and more successful option for PE retailisation, as the disclosure and suitability assessment requirements are likely to be a cause for concern for managers that are only used to an institutional investor base and corresponding requirements.

iii Non-European Economic Area managers

For fund managers domiciled outside of the EEA, the Netherlands has a private placement regime in place that allows for marketing to qualified investors (see Section III.iv, above).

iv Tax aspects

Taxation of Dutch private equity funds

Dutch PE funds in the form of a CV are generally structured to the effect that they are treated as transparent for Dutch corporate income and dividend withholding tax purposes. To secure transparent treatment, any (deemed) transfer or other change of a limited partner's interest is subject to the unanimous approval of all partners. As a result of the transparent treatment, the CV is not subject to Dutch corporate income tax, and distributions made by it are not subject to Dutch dividend withholding tax. Owing to the tax treatment, any profits derived by the CV are attributed for Dutch tax purposes to the investors of the CV. As of 1 January 2025, however, the limited partner consent requirement to secure tax transparency for CVs will be abolished (see also Section V.ii, below).

Dutch PE funds structured as cooperatives¹⁰ are treated as opaque for Dutch corporate income and dividend withholding tax purposes. Consequently, they are generally subject to Dutch corporate income tax (at a rate of up to 25.8 per cent), and distributions made by them are not subject to Dutch dividend withholding tax, unless the cooperative qualifies as a holding cooperative.¹¹ Profits of a PE cooperative, however, are typically exempt from Dutch corporate income tax because profits from shares representing at least 5 per cent of the aggregated nominal paid-up share capital of a subsidiary carrying out an active business are generally subject to the Dutch participation exemption. As such, no Dutch corporate income tax should be due on such profits at the level of the cooperative.

Management fees for Dutch PE funds are typically treated as exempt from value added tax based on the collective investment management exemption.

Taxation of corporate investors

In both types of structures, profits derived by Dutch corporate investors from the fund should either not be subject to, or be exempt from, Dutch corporate income tax; the latter situation is pursuant to the Dutch participation exemption. If one or more foreign individuals holds an equity interest of 5 per cent or more in any equity class of the fund, certain anti-abuse rules may apply.

CV cooperative structures are typically structured to the effect that non-Dutch investors are deemed to carry on a Dutch permanent establishment to which the interest in the Dutch cooperative is attributed. As a result, any dividend distribution from the Dutch cooperative (through the for-Dutch tax purposes transparent CV) to Dutch and non-Dutch corporate investors is exempt from Dutch dividend withholding tax.

In the case of a single cooperative structure, distributions to both Dutch and non-Dutch corporate investors are also not subject to Dutch withholding tax. Non-Dutch corporate investors are not subject to Dutch withholding tax only as long as the Dutch cooperative does not qualify as a holding cooperative. Actively managed PE cooperatives are generally not considered as qualifying as a holding cooperative.

v Key changes

From a regulatory perspective, one of the key changes in 2023 was the implementation of the more detailed Regulation (EU) 2022/1288 (supplementing the Sustainable Finance Disclosure Regulation (SFDR))¹² guidelines that apply as from 1 January 2023. The SFDR and Regulation (EU) 2020/852 (the Taxonomy Regulation)¹³ impose additional sustainability disclosure obligations both on an entity and at a product level. Dutch managers are required to make certain pre-contractual disclosures on their website and in the private placement memorandum. They must also make periodic disclosures in the fund's annual report. In both cases, the content depends on the SFDR classification of the particular fund.

In November 2023, the AFM published a position paper on improving the SFDR, in which the AFM proposes improvements to the current legislative framework to make it more meaningful to investors. The most noteworthy of these proposed changes are (1) to remove the current Articles 8 and 9 to tackle the current misuse as proxy labels and (2) to introduce minimum qualify requirements at product level to take into account the actual sustainability profiles of investment products. This position paper should be seen in the context of the broader review process of the SFDR by the European Commission (see Section V.i, below).

V Outlook and conclusions

i Regulatory

One of the regulatory developments that will have a major effect on managers in the coming years is the introduction of the Alternative Investment Fund Managers Directive II (AIFMD II), of which the final text was published in November 2023. The amendments to the AIFMD will introduce, among other things, a harmonised regime for loan originating funds, changes to the delegation provisions and a broadened scope of permitted activities for managers. As EU Member States will have 24 months to implement the AIFMD II into national law, the changes will come into effect in early 2026.

In the more immediate future, environmental, social and governance (ESG) profiling is expected to become an even more important factor in fundraising ventures. On the back of several large pension funds, there are increasingly more institutional investors wanting to invest in fund structures with – as a minimum – a qualification under Article 8 of the SFDR. This will require managers to tailor their investment policies and procedures in such a way that ESG factors are promoted via the investments they make. The AFM is expected to monitor this carefully and to conduct market reviews to assess the status in the Dutch asset management sector (in terms of compliance with the SFDR and taxonomy-related requirements). In 2023, the European Commission also released its consultation for a review of the SFDR. The consultation invites market parties to provide their views on a wide range of questions on the existing SFDR requirements. The review is likely to lead to changes in the current SFDR framework in the future.

Furthermore, the introduction of the Digital Operational Resilience Act (DORA) will have affect managers in 2024. The aim of DORA is to ensure that financial institutions, including managers, have better control of information technology risks and are as such more resilient to cyber threats. Managers must comply with DORA as of early 2025. Among other things, DORA requires managers (1) to make changes to their governance, so as to ensure that digital resilience is part of the competencies within its management body, and (2) to review existing arrangements with third parties – both outsourcing and purchasing agreements – to ascertain whether they are in scope of the new DORA provisions and as such will require amendments. DORA is expected to be relevant for a large number of managers that make use of information and communications technology or digital enhanced services for matters such as reporting, valuation or pricing.

Another area of interest is the potential retailisation of the PE market. Retailisation offers opportunities in the new economic climate in which funding by institutional investors seems to have reached its growth potential. The new ELTIF framework (see Section IV.ii, above) is expected to affect the growth of PE investment opportunities for retail investors in the Dutch market.

ii Tax

The Dutch government has adopted a bill as a result of which, among other things, the unanimous consent requirement for tax transparent classification of a limited partnership will be abolished, becoming effective as of 1 January 2025. After that date, a CV will generally classify as tax transparent for Dutch tax purposes. Another tax development is that a new withholding tax in respect of distributions came into effect on 1 January 2024. Distributions by cooperatives are subject to this new withholding tax to the extent made to an entity that is (1) considered related, either on a stand-alone basis or by virtue of being part of a collaborating group, and (2) treated as a 'bad investor' by virtue of being located in a blacklisted jurisdiction, receiving hybrid treatment (subject to rebuttal) or being subjected to an abusive structure. Attention is warranted in this respect, especially for CV cooperative structures.