Investment risk management

 

NIBC’s investment risk relates to positions in mezzanine and private equity investments that are all recorded and managed in Investment Management, which is a department of SBU Merchant Banking. The mezzanine and private equity investments can be divided in direct investments and indirect investments. The latter are limited partnership investments in funds set up and managed by NIBC (NIBC Funds). As NIBC controls some of the NIBC Funds managed by Investment Management, the mezzanine and private equity investments made by these funds are assets in the Consolidated Financial Statements of NIBC.

 

On the one hand, investment risk for mezzanine financing is comparable to credit risk, which is the risk that a change in the credit quality or default of a counterparty will affect the value of our position. On the other hand, investment risk for our equity investments is the risk that the value of the investment will deteriorate, and is part of the market risk approach.

 

The investment process at Investment Management is based on the following principles:

• We authorise investment risk exposure independent of the business originators;
• Before we commit to an investment, we require authorisation by the relevant committee or by at least two authorised individuals, according to the ‘four-eye’ principle;
• We perform systematic risk analysis on the investment, with the aim of identifying, measuring, and evaluating all risks, and utilising experts who are independent of the functions responsible for commercial or financial performance; and
• The principles of ‘know your customer’, ‘customer due diligence’ and ‘Corporate Social Responsibility’ are embedded as an integral part of our overall investment assessment and approval process.

 

 

Management of investment exposures

The responsibility for the management of both direct and indirect investment exposures rests with Investment Management. Direct investment transactions with respect to private equity and mezzanine exposures are approved by the IC. The IC also decides on impairments and revaluations. As far as indirect investment transactions are concerned, they are approved by the Investment Committees of the Funds, subject to the investment guidelines stipulated in the fund agreements between the general partner and the limited partners.

 

Risk policies are recorded in the Investment Risk Manual and the (fund) Risk Manual, respectively. For equity investments without quoted market prices, the fair value of the investments is estimated per quarter, and the valuation principles set forth by the International Private Equity and Venture Capital Valuation Guidelines are applied to the extent that these are consistent with IAS 39. The International Private Equity and Venture Capital Valuation Guidelines set out recommendations, intended to represent current best practice on the valuation of private equity and venture capital.

 

The assets of Investment Management are primarily private equity, mezzanine loans and warrant positions with low liquidity. Because the size of the investment portfolio is limited, we assess concentration risk per individual new asset. In the investment risk assessment process, we take into account the impact of a specific asset on both our market and geographical exposure profiles.

 

 

Investment process within NIBC Funds

Every investment proposition is assessed by an investment team, consisting of at least one senior investment manager and an analyst working within Investment Management. After an initial screening, the investment team may decide to reject the proposition or to prepare a preliminary analysis to determine if the investment is worth pursuing. The preliminary analysis is then discussed in a weekly team meeting and, if the decision to continue is made, we undertake a due diligence and market analysis. Ultimately, an investment proposal is written and submitted to the Investment Committee of the Fund for a final decision on the investment.

 

 

Investment control process

We review all investment exposures quarterly. The relevant investment manager drafts the review and makes a valuation of the investment as described above. The IC approves the valuations of direct investments, whereas the Investment Committees of the Funds approve the valuations of indirect investments.

 

 

Exit process

In each quarterly review, we update our exit strategy on given investments, if applicable. Once an exit has been decided upon by the investment team, the investment manager drafts an exit proposal outlining, among others, the timing of exit, the reason for the exit, and the expected revenues. This form is submitted to the relevant Investment Committee for approval.

 

 

Composition of investment exposure

The direct investment portfolio of Investment Management consists primarily of mezzanine and private equity investments, including private and listed common equity investments, preference and common shares, and shareholder loans. The indirect investment portfolio consists of Limited Partnership interests in own funds (non- consolidated) and third-party funds, as well as all mezzanine and private equity investments made by NIBC Funds controlled by and, by implication, consolidated into the Financial Statements of NIBC.

 

On a total level, the size of equity exposures remained stable between year-end 2008 and year-end 2007, at EUR 336 million. The tables that follow present the breakdown of equity exposures in industry sectors and regions.

 

 

Breakdown of private equity exposure per industry sector
In EUR millions		2008		2007
Financial Services		41		58
Health/Education		7		6
Manufacturing		14		24
Real Estate		26		33
Shipping		26		27
Trade		101		100
Infrastructure		43		13
Other		78		75
total at 31 december		336		336

 

Breakdown of private equity exposure per region
In EUR millions		2008		2007
The Netherlands		260		249
United Kingdom		17		8
Germany		7		28
Rest of EU		19		20
North America		33		30
total at 31 december		336		336

Note 56 to the Financial Statements contains a breakdown of NIBC’s mezzanine loan portfolio.