Anton Kramer: Investing domestically
This column was originally written in Dutch. This is an English translation.
By Anton Kramer, Co-founder of OverRendement
Dutch pension funds are under pressure from both politicians and the business community to invest more domestically. Hundreds of billions are needed, particularly for housing construction.
Meanwhile, pension funds are not standing idly by. For example, ABP has set aside €10 billion for Dutch impact investments. PME, PMT and PFZW are pressing ahead and have already made various investments in Dutch and European initiatives, ranging from renewable energy to developments in medical robotics. These investments can stimulate the Dutch economy and reduce dependence on foreign technology. The trend towards deglobalisation calls for domestic capital for domestic innovation. The Netherlands has the knowledge and innovative capacity to be a pioneer, but that also requires capital for high-risk investments.
At the same time, mandatory investment in one’s own country also has a downside. However appealing the idea may sound, mandatory local investment simply restricts investors’ scope for action. The Wennink report acknowledges the need for sufficient investable opportunities. Dutch pension assets are substantial, exceeding annual GDP. A price-driving effect cannot be ruled out if pension funds enter the Dutch market en masse. Pension funds also become more sensitive to the economic situation in their own country. Making one’s job, house price and pension dependent on the same national economy also increases vulnerability in the face of economic headwinds.
In addition, there is the question of the exit strategy. Many private equity and venture capital funds operate on a cycle of 5 years of investment followed by 5 years of divestment, after which the companies must be sold. From a local perspective, it would seem logical not to sell these companies to the highest international bidder. The risk is that the technology or the company will then still end up abroad. Consider the sale of Solvinity, the Amsterdam-based company on which DigiD relies. It had been owned by a London-based private equity fund for around 10 years and is now being sold to an American IT company. Imposing restrictions on the origin of potential buyers leads to a lower return.
I reckon that a large group of pension fund participants would like to see more investment in the local economy. Even if that might lead to a less-than-optimal risk-return ratio for the investments. Certainly when innovations improve the quality of life for pensioners. But there will also be a group that is unwilling to make concessions. The choice of a defined-contribution scheme has made it difficult to incorporate these nuances into investment policy. Perhaps that is the next step in the pension system: giving participants genuine freedom of choice over how their pension funds finance the future. After all, pension funds must not only invest in innovation, but also dare to innovate themselves.