Iceland has a population of only 300,000 and a GDP of €7bn. However, there are around 20 pension funds worth well over a hundred million euros, with the biggest ones worth more than a billion. But private equity as a pension fund asset is still in its early stages, though there are lots of intentions to invest in the future.
“Only a few pension funds have decided to add this asset class to their portfolios,” says Gunnar Baldvinsson, director for the pensions unit with the asset management arm of the Islandsbanki bank. “There are, however, many funds looking at it now.”
“Most of the bigger funds have started private equity programmes and decided how they are going to invest,” says Bjarni Gudlaugsson, fund manager at Kaupthing Bunadarbanki, a bank that has both retail and investment arms, and runs its own investment funds. “Some of the smaller pension funds also hold private equity,” adds Gudlaugsson.
Most Icelandic pension funds cover a specific geographic region or industry; company pension funds are few and far between.
By law, up to 50% of pension fund portfolios may be held in equities. On top of this, however, 10% can be held in unlisted securities, as long as they are issued by entities within OECD countries.
The current legal framework and the attitudes of pension fund managers reflect the need to move more into equity and foreign assets to earn a satisfactory return, as total pension fund assets - now worth just over 100% of GDP - continue to dominate the local economy.

According to Gudlaugsson, Icelandic pension funds invest in private equity primarily through the use of funds of funds.
“Many started five years ago,” he says. “Last year and this, pension funds have been contemplating the next step to more exposure, and some have already made their allocations. Most of them have selected between four and six funds of funds. The average total allocation to private equity is 2% of the portfolio.”
He says that the pension funds have gone into private equity mainly for the high yield.
“But many of them have also gone into it because they are looking at best practice as carried out by the bigger pension funds in Europe and the US,” Gudlaugsson says. “They see an asset class that has yielded well for the big funds. They are just getting the first realisations on their investments, and they are getting a 15-25% yield.”
One of the more popular private equity fund managers is Schroders; nearly all the major Icelandic pension funds have invested in Schroder Fund of Funds II. Launched in 2004, it is split roughly equally between Europe and the US. Investments are mainly buyouts, although up to 10-15% will be invested in venture.
However, local fund managers also have a slice of the action. Kaupthing Bunadarbanki runs two funds of funds, International Private Equity I and II.
The first was launched in 2000 and the second, which was launched last year, is currently being allocated .
Both funds are worth around €100m and have global portfolios skewed towards Europe.
“We benchmark ourselves to average private equity returns,” says Gudlaugsson. “We hope to get 500 basis points over public markets. So far, we have received some nice exits from our underlying funds.”
Iceland also has a fairly active indigenous private equity industry. For instance, when the national telecommunications company was privatised, most of the international private equity houses participated, but in the end the company was sold to local players.
There are also several local funds investing in Icelandic companies.
Kaupthing Bunadarbanki’s inhouse fund, Uppspretta, invests mainly in Nordic venture capital companies using opportunistic strategies. Others are sponsored by another local bank and by the government, the latter as part of a growth project.

Generally, however, according to Gudlaugsson, local pension funds go for global exposure. “They tend to focus on the buyout market in Europe and the US, but they do have some venture as well,” he says.
And he says they also have the know-how to invest successfully in private equity.
“Quite a few of them have come on our advisory board and met managers from the bigger funds in the UK and Europe,” says Gudlaugsson. “That has helped them gain a better understanding of the industry.”
He considers that Icelandic pension fund managers are relatively sophisticated compared with other countries.
“They have been going to see the right people, going to seminars, and getting the right advice. But they will still need help in niche areas.”
One of the problems in investing in private equity is its ability to affect other parts of the financial community: “If something goes sour in one sector, it’s going to hurt the whole industry, just like the LTC hedge fund debacle did,” says Gudlaugsson.
And he is fairly clear-eyed about the future. “Developing Icelandic pension fund involvement in private equity is going to be a long process,” he says. “Some venture investments didn’t go too well after the 2000 stock market crash, and that has led to a lot of scepticism. But we’re slowly coming back.”
“My expectations are that Icelandic pension funds will gradually move into this asset class and invest up to 5% of their assets,” says Baldvinsson.