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CERN Pension Fund builds up PE portfolio with Keensight investment

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CERN Pension Fund is investing €4m in Keensight IV, a European growth private equity fund, as part of its drive to increase the private equity allocation within its CHF4bn (€3.3bn) portfolio.

At present, around CHF123.3m, or 3.05% of the portfolio, is invested in private equity, but the plan is to invest CHF70m a year for the next few years, to bring the allocation up to 5%.

Carlo Farina, head of external selection at CERN Pension Fund, said: “We started to push private equity to another level about 18 months ago from its then peripheral position.

“We wanted to target multinational companies rather than small local companies, and also to mitigate the J-curve of our portfolio across all investments.”

As a whole, the fund’s target return is inflation plus 3%.

The private equity portfolio has delivered 13.62% for the year to 18 November. 

From investing in private equity on a piecemeal basis, the fund has moved towards a more systematic approach using a gatekeeper, StepStone, with a detailed tactical plan.

Keensight IV, which had raised €250m by final close and was heavily oversubscribed, will target rapidly growing companies across Europe with revenues between €15m and €150m.

Individual stakes will range from €10m to €30m, and include both minority and majority shareholder positions.

Keensight Capital specialises in the internet and media, information technology, healthcare and services sectors.

Its most recent exits included the sale of its stakes in Octo telematics, which provides telematics services for the automotive market, and in FircoSoft, a provider of software solutions for filtering banking transactions.

Keensight also supported LDR Medical, which manufactures spinal implant devices, in its successful flotation on the Nasdaq.

The three exits generated a multiple of five times the initial amount invested.

Farina said: “We decided to invest in the fund mainly because the team has a good overall track record – for example, at end-2013, Keensight III posted a gross internal rate of return of 29%.

“Furthermore, Keensight has achieved 28 successful exits despite the difficult macro conditions in Europe and with a conservative use of leverage – historically, no more than 3 x EBITDA (earnings before interest, tax, depreciation and amortisation).”

In its private equity portfolio, CERN now owns eight primary investments, four secondaries and one co-investment, all through funds.

It mostly avoids venture capital because of the relatively high investment risk but has successfully invested in small and large buyouts, distressed assets and co-investments, mainly in North America and Europe, but avoiding emerging markets.

Farina said: “The macro-economic situation in Europe makes investing difficult, and I don’t see that the region will return to pre-crisis levels of growth any time soon.

“To produce a consistent return, you need to find niche companies with some global exposure.”

But he said there were opportunities in secondary investments sold on by banks.

“Some banks have been forced to sell private equity holdings by regulations in their countries,” he said.

“Other banks are selling because they overpaid for investments – particularly in infrastructure such as toll roads – got their fingers burnt, and are now getting rid of them at huge discounts.”

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