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Pension funds are the most important source of private equity finance in Denmark, easily outstripping corporate investors, banks and insurance companies.
Even so, they have recorded a sizeable increase in investment over the past year. In 2002, the percentage of Danish private equity investment raised from pension funds was 33.4%, according to the European Venture Capital Association. In 2003 however, this share had grown to 38.2 %.
But in total, funds raised went down, from around e300m in 2002 to e211m in 2003. And pension fund investment dropped slightly in absolute terms, from e79.33m in e2002-76.96m in 2003.
Even so, this is a turnaround from 2001 and 2002, when pension funds looked to cut back on their exposure to private equity.
“After the market meltdown in 2001, the Danish Financial Services Authority implemented the traffic light scenario, which tells them whether a fund has sufficient reserves,” says Steen Villemoes, nordic representative of Altius Associates, a gatekeeper and private equity adviser to institutions.
“During 2001 and 2002, assets were shrinking, and the market value of liabilities increased due to falling interest rates. Now if a pension fund’s reserves shrink below a certain size there is a risk of going into administration. So pension funds, fearful of equities, looked to cut back on their equity exposure.”
Many Danish pension funds had dipped a toe in private equity in the late 1990s, but held off during the problem years. According to Villemoes, most of them have now started up their programmes again.
He says: “The name of the game is the search for alpha, and equity exposures are back to more ‘normal’ levels.”

There are between 20 and 25 bigger pension funds in Denmark. And according to Villemoes, over half of these are now involved in private equity programmes. A typical target weighting is between 3 and 5% of the total portfolio, although a few have a target of more, and ATP, as the by far largest investor in Denmark, has up to 10%.
Danish pension fund investors tend to be fairly risk averse in terms of where they place their money, says Villemoes. “Most Danish money goes into Europe rather than the US,” he says. “There are also a few Danish-based fund managers, such as Polaris and Axcel, and these attract understandably more money from within Denmark than from outside.”
As a whole, private equity investment within Denmark in 2003 made up 0.221% of its GDP, according to the European Venture Capital Association. This placed it seventh in the pecking order, just behind Italy and ahead of Ireland.
The percentage was still below the European average of 0.288%, although this is skewed by the UK’s contribution, which is much higher than any other country’s.
“In general, Danish pension funds have increased in importance to our company, compared with insurance company funds,” says Per Forsberg, director with north European private equity house EQT Partners. “Certainly in terms of buyouts, my impression is that Danish pension funds are increasing their focus and commitment. And in that area, they are working more with gatekeepers and fund of funds, rather than local groups such as ourselves.”
Some Danish pension funds which are large enough to make economies of scale are establishing inhouse expertise. One of the biggest is ATP, which has established its own private equity arm (see case study).
Another of these is PFA Pension, started in 1917 as the first provider of alternatives to a government pension plan. An independent private company, it manages funds for companies which need private pension plans for employees. PFA Pension now has net assets of e22bn.
“We started a private equity programme because we believe this asset class allows us to get superior returns over quoted equities,” says Peter Caroe, head of alternative investments, PFA Pension.
The company started looking at private equity in 1999, but stopped the following year because of problems with the equity markets. It then picked up the programme again at the end of 2002.
PFA Pension started out using funds of funds such as those from Standard Life, Schroders, Lombard Odier, and ProVenture, “We have made very few new investments in venture,” says Caroe. “That type of asset class has been very disappointing. But eventually we will move into venture as well – more in the US than in Europe, most likely."

Caroe says: “On the primary funds, we are still in the J-curve. But secondary funds have done very well.”
Six months ago, however, PFA pension changed strategy, and hired Cambridge Associates as a gatekeeper to enable it to go into funds directly.
“We needed a consultant because we want to keep a small staff,” says Caroe. “We think it can be dangerous to be working without the help of consultants for European and worldwide exposure.” PFA Pension may be doing a few direct investments into companies, but then only in the Nordic region.
As a whole, Caroe says the private equity portion of PFA Pension’s portfolio is presently overweight in Europe and underweight in the US.
PFA has now doubled the percentage of its assets held in private equity, from 0.5% in 2002 to 1% as at present, and the company expects to increase that percentage further in the coming years.
The target return for the private equity programme is currently 300 basis points over listed equity.
Caroe says: ‘We want to increase the allocation to private equity further, although we have not decided on the percentage yet.’

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