Dutch small-cap fund uses private equity approach for top-rated performance

A small-cap fund focused on Dutch companies was the top performer of all European small cap equity funds last year.

Monolith Investment Management, a small-cap equities fund based in Amsterdam, in November this year is set to pass the landmark five-year track record needed to attract new institutional investors.

Daan van Vlaardingen and Dimitri Kaandorp, both founders and fund managers, along with two members of Monolith’s current advisory board, left managing Kempen & Co’s Hidden Value Fund to set up on their own. In five years, that fund achieved returns of 12% or more.

Given that the fund was doing well, why leave? “The strategy became difficult to execute because of conflicts of interests with the firm’s corporate finance and brokerage divisions, and it only became worse,” says van Vlaardingen. Luckily for him, investors liked and trusted the approach he had been using on the Hidden Value Fund and said they would back him in opening a new one.

The investment approach is certainly unusual. Unlike many other fund managers who pick companies that are already performing well, Monolith’s team of six chooses companies going through some level of distress.

Typically, firms have a two-year history of poor financial performance and a low stock price. Monolith’s fund managers seek to establish why they have failed to achieve decent returns. If they decide the company has the potential to turn around, they will draw up a plan for change with the management in return for financial backing.

In that way, Monolith works like a traditional private equity firm. It holds a bias towards Dutch companies, with 70% of its portfolio invested in those firms. Another 30% goes toward German firms, and 10% Norwegian. In both cases however, a Dutch element still runs through the investment rationale.

The German firms Monolith selects have a similar two-tier governance structure to those in the Netherlands, whereby the management board handles day-to-day operations and a supervisory board gives advice and monitors corporate governance. A tight portfolio is run, with only eight equities held on Monolith’s books. As of 31 December 2010, those included Amsterdam Commodities, a food and rubber supplier, Batenburg, which owns a profile of installation companies, Dockwise, a logistics supplier, and Teleplan, which offers communications solutions.

With Amsterdam Commodities, van Vlaardingen and his team decided to sell off its rubber division, seen as a volatile and loss-making business. This enabled the firm to expand into food, making a large acquisition last year.

For Teleplan, Monolith oversaw such success that a large Dutch private equity firm, Gilde, bought it on 9 March this year. Originally purchased for €1 per share, it sold the company at €2.50 per share just three years later. Within that time, Teleplan became attractive to institutional investors again, and was re-rated on the stock exchange.

Performance of the fund has rocketed in the past two years. In 2010, it delivered 32% returns for its investors, and in 2009 it hit a high of more than 76%. Van Vlaardingen expects the performance to drop back down this year, but remain virtually on a par with its average total returns of 11%, ranging between 10 and 12%.

However, in 2008, the fund was dealt a hefty blow, losing 40%. “We didn’t lose, with a couple of exceptions, any clients,” Van Vlaardingen says, citing that as an achievement given many funds either closed or imploded. “Our P&L was bad; we had to fire some people. We had to take some measures, but we did that,” he recalls.

How did the fund keep its investors? By being professional and communicating, says van Vlaardingen. “You have to be transparent about what you do, it’s a pre-requisite. We take account management very seriously.”

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