In 1998, when the Stockholm-based life and pensions company, Länsförsäkringar Liv (LF) was on the point of merging with the much larger life insurer WASA Liv, it says it already enjoyed a position as a private equity (PE) investor that was unique among Nordic institutions, with a PE allocation of almost 6% of its total assets under management and a decade of operating very successfully in this area. Though its investments at that point had more or less been opportunistic, LF says its PE strategy achieved net annual returns close to 50%. Furthermore, LF says it enjoyed complete continuity in the management of its PE investments and there was a strong belief among the board and top management in the fundamental advantages of private equity compared to the public markets.
But the merger with WASA saw assets under management increase almost five times their former total to €9bn and the PE exposure conversely drop to just over 1%. This led to the decision to restructure and rebuild the PE portfolio so that it would account for 5% of the asset under management over a five- to seven-year period going forward. Given this would require annual fund commitments of at least €150m during the growth period, LF realised that taking an opportunistic approach to PE investing would no longer be enough.
After careful consideration, the strategy LF chose for the restructuring was to continue building on the extensive knowledge it had already accumulated in-house by establishing a dedicated alternative investments department, taking on additional staff and enlisting the services of specialist advisers in areas LF thought it made sense to do so. The most common alternatives strategy, according to LF, of relying heavily on funds of funds providers, was considered to have too many insurmountable disadvantages such as excessive costs and poor alignment of interest.
Following the launch of the strategy, the PE portfolio was carefully expanded so that, by the end of 2001, it included, LF says, 20 of the world’s leading and most sought-after private equity managers and was of a quality and scope that is probably unmatched in the Nordic region.
In early 2002, the strategic decision was taken to completely separate the alternatives investments department. LF says the attraction of this move was that it greatly enhanced the prospects of ensuring the long-term commitment of the investment managers involved.
Moreover, LF recognised that this highly specialised investment area would benefit from an independent and entrepreneurial environment. It was also another means or reducing overall costs, if non-competing institutions joined the client list.
The introduction of the new strategy and the restructuring it implied led to the creation in 2002 of Nordic Alternative Investment Advisors (Nordic Advisors), which consisted of LF’s chief financial officer, who had been with LF for 18 years at that point and who had initiated and overseen all LF’s PE activities from the start, and the entire six -strong alternative investment department. By 2003, Nordic Advisors employed nine people.
Two years on and LF feels it is in an enviable position in the private equity area with a world class portfolio, especially when compared with other Nordic institutions. It is already well diversified and consists of 28 core relationships with buyout and venture capital managers in the US and EU. With just a few exceptions, LF says its managers are very highly ranked among leading private equity investors with funds that are typically and significantly oversubscribed.
The fact that LF has a long-standing relationship with the staff at Nordic Advisors and is highly satisfied with the way the new strategy has performed so far gives the company a high comfort level with respect to the continued management of its private equity portfolio. Moreover, LF says its set-up benefits from very low management fees, as the cost of using Nordic Advisors translates into a management fee of less than 40 basis points. This can be compared to the 150–250 basis points effectively charged by fund of funds providers
LF says it enjoys a high level of customisation and control over the private equity investment strategy and process as well as over reporting with no strain on internal resources, since the nature the relationship it has with Nordic Advisors requires minimum effort on LF’s part.
Overall, LF feels it has found in this strategy an appealing long-term sustainable solution to the continued success of its private equity portfolio.
Highlights and achievements
The merger between Länsförsäkringar Liv (LF) and WASA Liv in 1998 created the odd situation whereby LF’s successful private equity (PE) portfolio fell from almost 6% of the insurer’s total assets, placing it in a unique position among Nordic institutions, to just over 1%. In danger of seeing the asset class get lost in the huge new asset base, LF successfully altered its approach to PE investing so that the former opportunistic investment environment was replaced by a sustainable and long-tem strategy designed to ensure PE accounted for 5% of the merged company’s assets and be able to deal with the large inflows of cash this would entail.
The solution was to include PE in the company’s new spin-off alternatives company. Here the carefully expanded portfolio has benefited from the consolidation of LF’s alternatives departments. Centralising the company’s expertise and knowledge in this way has led to a successful and long-term sustainable PE investment strategy being implemented.
LF has also benefited from the reduced costs running its PE portfolio as part of its new alternatives’ company as well as a high degree of control over its overall management and strategy.