Leading from the front
The €11bn private equity mandate awarded by Dutch pension funds ABP and PGGM to AlpInvest Partners has taken Dutch institutional investment in the asset class to a whole new level.
But will this kick-start a renewed interest by other Dutch pension funds - particularly the smaller ones - in private equity?
ABP and PGGM possess between them €250bn-worth of assets under management, of which €187bn belong to ABP and €69bn to PGGM.
The aim over the long term is to commit around 4% of ABP’s portfolio and 7% of PGGM’s portfolio to private equity.
“In a US context, this percentage allocation to private equity would not be surprising, but it is relatively high in a European context,” says Volkert Doeksen, AlpInvest’s chief executive. “However, this is not surprising, given the size of the pension funds in relation to their peers in Europe.”
This being the pension funds’ third private equity mandate, ABP/PGGM had already committed €20bn to AlpInvest.
Between 75 and 80% of the new mandate will be invested in private equity funds globally. In regional terms, the commitments will focus on Europe and the US, while AlpInvest will also be looking for opportunities to invest in Asia. At present, 45% each is committed to Europe and the US, with 10% to the rest of the world.
The balance will go into co-investments and secondaries, and a small amount in mezzanine investments, both through funds and direct.
Doeksen says the target return is a few per cent above the returns for publicly-listed companies.
The co-investments will be made up of a core where AlpInvest is investing alongside general partners such as KKR and CVC in Europe and the US.
Secondary investments will comprise whole portfolios bought secondhand from limited partners. AlpInvest says that secondaries form an important part of their business.
The two pension funds have been investing in private equity since 1985, and have enjoyed a 15% return for the past 10 years.
Reitze Douma, senior portfolio manager, private equity, with PGGM, does not think that the new mandate will have a direct effect on the asset allocation of other Dutch pension funds.
“They may have different liability structures compared with PGGM, so their risk profile may be different,” he says. “However, I think that other pension funds should consider private equity, but based on their own situations and expertise. This can be done using an ALM study to help determine their strategy.”
Douma also points out that private equity is a complex asset class.
“It’s not enough to invest just 1% of your assets in private equity,” he says. “So pension funds using it need to have in-house skills or hire them from outside. That leads to more costs. Furthermore, pension funds have to be aware that it is an illiquid asset category, and they will only get returns after six or seven years. At first, they will have to report losses, and that is very difficult to explain to pension fund trustees. So the only practical way to do it is to hire skills and start off in funds of funds, then diversify as much as possible.”
One of the problems for such a large mandate is whether there will be the capacity in the private equity market to give it the required returns. “AlpInvest is one of the biggest private equity investors in the world, so they have access to the best general partners in the world” says Douma.
“We already have a long history in this area, so it’s easier to allocate our capital than if we were new entrants. It is new investors entering the market for the first time who might have problems.”
AlpInvest is a joint venture between ABP and PGGM, so Douma says that they were the natural choice for the mandate.
Outside experts however are more hopeful that the new private equity mandate will blaze even more of a trail for others.
“The big Dutch pension funds started in private equity a long time ago, and are still committed to the asset class,” says Andrew Musters, partner with Robeco Private Equity. “Now we are seeing small and medium-sized pension funds increasing their allocations as well, the minimum investment being about €10-15m. Our fund of funds gets an increasing amount of investments from Dutch pension funds. And we are providing an ongoing service for institutional investors explaining what the asset class is, and how they should view private equity in terms of ALM.”
Musters says there has been a lot of talk in the press about private equity, and even the small pension funds are starting to realise that it is not easy to beat their benchmarks using equities and bonds, so they have to look at the alternatives.
“ABP are considered to be leaders of opinion, and the mandate is a good comfort to smaller pension funds, giving validity to their own interest in the private equity,” he says. “What is most important now is a general trend towards the core/satellite approach, by which they use alternatives to diversify and provide additional returns.
“For the past 20 years, public equity has outperformed public equity and has had an alternative correlation of 0.6 to public funds and – 0.3 to bonds, so it makes a lot of sense from a diversification point of view.”