AP7, the largest of Sweden’s AP national pension funds, is steadily expanding a growing allocation to alternative assets and is now on the hunt for someone to lead that five-strong department.
For most of its 25-year history, the SEK1.4trn (€128bn) fund, which runs the default option in a defined contribution (DC) premium pension system, has invested almost exclusively in listed equities and bonds.
But in 2023, a new mandate allowed it to expand into unlisted assets such as real estate, private equity and infrastructure.
In an interview with IPE this week, chief investment officer Lena Fahlén said: “We are currently recruiting a head of alternative investments and are open to both internal and external candidates.”
AP7’s expansion into alternatives is progressing in line with the strategy for alternative investments that the fund has developed in close collaboration with its board, she said.
“We are focusing on the Nordic real estate market and increasing our direct investments in private equity – primarily in larger buyout funds,” said Fahlén.
Right now, the Stockholm-based pension fund’s alternatives management operation consists of five people – three working with private equity and two with real estate, the CIO said, adding that another person would join the real estate team at the turn of the year.
“We expect the team to grow somewhat further,” she said.
Although still a very lean organisation compared to institutional investors with similar levels of assets, AP7’s total workforce has been expanding rapidly, and this year alone has grown to 70 from 56.
The fund has been busy recruiting senior expertise across all asset classes – equities, fixed income, allocation, and alternatives, according to Fahlén.
AP7 has been building on its first steps into illiquid assets taken in 2023, which included a $835m (€768m) investment in a private equity fund from asset manager HarbourVest, and a SEK7.4bn deal alongside occupational pension fund AMF to buy central Stockholm city block Urban Escape.
AP7 has since announced a further SEK3.57bn investment in Urban Escape, increasing its stake in the joint venture to become near-equal partners with AMF, and said this month that it plans to expand that cooperation still further.
“Currently, approximately 4% of the equity fund is allocated to alternative investments, which corresponds to around SEK50bn,” Fahlén said.
For the first half of this year, AP7’s default option product, Såfa, made a 3.7% investment loss, with equities hit by April’s market turbulence around concerns over US trade tariffs, as well as a strengthening Swedish krona.
IPE asked Fahlén whether a larger allocation to alternatives might have helped stem such losses.
“We see alternative assets as an important element in further diversifying the portfolio, but we are in no rush to scale up our allocations,” she noted.
“The foundation of AP7’s equity fund will, however, remain a global equity portfolio with leverage,” she said.
Alongside real estate and private equity, infrastructure could be the next unlisted asset class AP7 adds to the mix.
“We are analysing infrastructure as an asset class, assessing its potential contribution to the portfolio and the added value it could bring,” the CIO continued.
On the challenges involved in developing an alternatives allocation, Fahlén said: “Alternative investments are a heterogeneous asset class that demands a high level of expertise, both in portfolio management and across the broader organisation.”
“However, I am confident that we are building both the team and processes in a sound and thoughtful manner,” she added.
AP7 has a mandate, as of January 2023, which allows for up to 20% of its growing assets to be allocated to alternatives.
“However, I do not consider it likely that we will reach that level,” the CIO said.
“We are building the portfolio in a structured and deliberate way, prioritising quality over speed,” she said.
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