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IPE special report May 2018

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AP4 calls on government to open door to unlisted direct investments

The fourth of Sweden’s state pension buffer funds has called on the country’s government to allow the funds to add unlisted direct investments to their portfolios.

In July, the Swedish Finance Ministry proposed to amend the mandate for the AP funds. In a lengthy response to the consultation, AP4 said it welcomed the increased flexibility the new rules would give it to allocate between asset classes, but said allocation options should be accompanied by additional opportunities for unlisted direct investments.

Niklas Ekvall, chief executive of AP4, said: “AP4 believes it is important that the increased allocation capabilities be supplemented with opportunities for direct investment in unlisted companies and credit.

“The memo does not include this, which is unfortunate as it would allow more long-term and cost-effective investment rather than just investing indirectly in funds.”

Including direct unlisted investments was also in line with prevailing market trends and practices, he said.

Ekvall cited examples such as co-investments in unlisted companies alongside venture capital funds, major institutional owners or other investment consortia, and infrastructure companies. The latter should be possible in the same way as the AP funds currently invest in real estate companies, he said.

These two asset types were very similar and adding infrastructure would give exposure to an attractive and socially-beneficial investment area in a cost-effective manner, Ekvall added.

The CEO cited private credit as an emerging and socially important area of investment since the 2008 financial crisis.

He also highlighted sustainability-orientated investment opportunities and initiatives, which were likely to increase in importance in the future. “Most of these are unlisted and therefore not investable according to the memo,” Ekvall said.

AP4’s sister fund, AP6, was set up in 1996 to invest solely in private equity. Sweden’s government had proposed merging AP6 with AP2, but this idea – part of a wider restructuring proposal for the AP fund system – was rejected in 2015.

Regarding the most recent investment guidelines proposals, the Finance Ministry’s draft of the amended mandate puts in place a new 40% ceiling on illiquid investments, replacing the current 5% cap on unlisted instruments.

The 40% ceiling is to include real estate, an asset class that is not restricted under the current rules.

Among other proposed changes to the mandate is a reduction in the minimum allocation to interest-bearing securities with low credit and liquidity risk to 20%, from 30%.

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