Investment risk management

 

NIBC’s investment risk relates to positions in private equity, infrastructure equity and real estate equity investments that are recorded and managed in Investment Management, which is a department of Merchant Banking. These private equity investments can be divided into direct and indirect investments. Indirect investments are investments made through funds set up and managed by NIBC (NIBC Funds) that are controlled by NIBC and thus consolidated into the consolidated financial statements of NIBC. Direct investments are all other investments and consist of private and listed common equity investments, preference shares, warrants and interests in funds managed by NIBC or by third parties where NIBC does not exercise control.

 

Investment risk for the private equity investments of NIBC is the risk that the value of the investment will deteriorate. NIBC includes investment risk in its market risk framework.

 

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

• Investment risk exposures are authorised independently of the business originators;
• Systematic risk analysis of the investment is undertaken, with a view to identifying, measuring, and evaluating all risks; and
• The principles of Know Your Customer, Customer Due Diligence and Corporate Social Responsibility are embedded as an integral part of the overall investment 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 exposures are approved by the IC. As far as indirect investment transactions are concerned, these are approved by the investment committees of the NIBC Funds, subject to the investment guidelines stipulated in the fund agreements between the manager of the NIBC Fund and the investors.

 

The private equity investments of Investment Management are generally characterised by low liquidity. Because the size of the investment portfolio is limited, concentration risk is assessed per individual new asset. Market and geographical exposure profiles are also taken into account.

 

 

Investment process

Every investment proposition is assessed by an investment team, consisting of at least one senior investment manager. 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 team meeting and, if the decision to continue is made, due diligence and market analysis are undertaken. Ultimately, the investment proposal for direct investments is submitted to the IC for a final decision on the investment, whereas the investment proposal for indirect investments is decided upon in the investment committee of the NIBC Fund.

 

 

Investment control process

All investment exposures are reviewed on a quarterly basis. The investment manager drafts a review document and prepares a valuation of the investment in accordance with the International Private Equity and Venture Capital Valuation Guidelines, 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 review documents of the indirect investments are challenged by the manager of the NIBC Fund, who determines the valuation, or impairment, as the case may be. Finally, all valuations and impairments are approved by the IC.

 

 

Exit process

In each quarterly review, the exit strategy of every investment is updated, where applicable. If an exit is considered by the investment team, the investment manager drafts a divestment proposal outlining, among others, the timing of the exit, the reason for the exit, and the associated divestment proceeds. Divestment proposals for direct investments are submitted for approval to the IC. Divestment proposals for indirect investments are submitted for approval to the investment committee of the NIBC Fund.

 

 

Composition of investment exposure

On a total level, the size of the Equity Investment portfolio slightly increased at 31 December 2009 (EUR 345 million) in comparison to year-end 2008 (EUR 336 million). Tables 22 and 23 present the breakdown of the portfolio in industry sectors and regions. Note that the amounts shown in these tables represent on-balance amounts. Off-balance commitments of NIBC amounted to EUR 102 million at 31 December 2009 (31 December 2008: EUR 163 million).

 

 

Table 22 Breakdown of equity investments per industry sector
In EUR millions		2009		2008
Commercial real estate		24		26
Financial services		43		41
Health/Education		4		7
Infrastructure		54		43
Manufacturing		14		14
Shipping		21		26
Trade		138		101
Other		46		78
total at 31 December		345		336

 

 

Table 23 Breakdown of private equity exposure per region
In EUR millions		2009		2008
The Netherlands		280		260
United Kingdom		1		17
Germany		0		7
Europe		31		19
North America		31		33
Other		0		-
total at 31 December		345		336

 

Note 56 to the consolidated financial statements contains a breakdown of NIBC’s Investment Management Loan portfolio.