What is your approach to private equity?
Fund of funds, growth markets and buyouts
CEO ATP Private Equity Partners (PEP)
• Danish labour market supplementary pension
• Invested assets: DKK624bn (€83.7bn)
• DB scheme
• Date established: 1964
Private equity is about finding the right managers and making sure that we do not invest all of our capital in one part or segment of the market. The private equity arm of ATP – ATP Private Equity Partners (PEP) – was founded in 2001 after an ALM study concluded that a significantly higher exposure to private equity than the 0.5% of the overall portfolio was needed.
The pension fund needed a separate investment team to take care of the investment programme and having it in-house was cost-efficient. ATP also wanted an incentive programme in place which ensured alignment of interest between the team and the pension fund, which is why it introduced a long-term carry programme, making the 20-people strong team invest its own money alongside the general partners’ (GP) funds.
ATP PEP is a fund-of-funds model, which invests globally in private equity funds, venture funds and distressed funds.
From a pension fund point of view, setting up an internal fund of funds gives control over the strategy because the fund is the single sponsor and can monitor performance and risk more specifically than with an external mandate.
Over the past 12 years, we have made 130 fund investments in more than 80 GPs and met more than 2,700 GPs globally. Today ATP PEP has around DKK26bn (€3.5bn) in assets under management, which is 4.2% of ATP’s overall invested assets.
It is a global mandate with 90% of investments made in the US and Europe and 10% in emerging markets, including Eastern Europe, Africa, Asia and South America.
The investments have fulfilled our expectations – the 2012 study by research house Preqin named ATP the most consistent fund of funds globally, with all three funds among the top quartile performers.
The first fund, starting in 2003, produced some early returns, almost as if the j-curve was absent. The funds of 2005 and 2007 took slightly longer before they drew down the capital and started investing. In other words, the first fund may have been 45% call at the maximum point while the latter funds were at 65-70%.
Environmental, social and governance factors are part of the due diligence process of the funds. We believe that if you are true towards those kind of values then the longer term will only benefit from that, meaning we are going to get the best possible value for our investment when we sell it.
• Assets under management: €1.3bn
• Members: 15,000
• Two separate DB funds with €1.2bn and €100m each and €0.2bn DC scheme
• DB funding level: 104%
• Date established: 1942
We have been investing in private equity in our DB plans since 1998 and manage the asset class internally.
We have always had a strategic allocation of 2% of the total portfolio in private equity and that has not changed despite a number of discussions on whether we should increase it.
One reason for not increasing our private equity allocation is the large amount of administration, due diligence and reporting involved. The amount of governance and reasonable amount of capital required also mean that less than a handful of Belgian pension funds currently invest in private equity.
For us, private equity is part of our strategic 35% equities allocation, which is split in 33% public and 2% private equity.
We do not see any diversification in private equity versus public equity – in the end private equity has the same risk profile as its public counterpart. We invest because we hope to generate some extra return from the asset class’s illiquidity premium.
The law says that our portfolio as a whole should be liquid but it has no specific requirements. By looking at the financing plan, the cash flows and extreme stress scenarios, we have to find out ourselves how much we can afford to be in illiquid assets.
That portion stands at around 10-12%, 2% of which is taken up by private equity, while the other 10% are real assets, such as real estate and infrastructure investments.
Market risk is the main risk in private equity. To minimise this we only undertake private equity investments in Europe and the US. But our allocation is split between different providers, sectors and managers.
Our experience with private equity has been mixed. We have invested money with some very good managers who achieved the returns we expected – other managers, however, did not.
Our latest commitment to a private equity fund was to a secondaries fund, which helps us avoid the j-curve and generate a return much faster than any primary investments.
Initially, our private equity investments were evenly split between venture capital, such as in the biotech and ICT sector, and traditional buyouts.
But because we do not feel that the extra risk that comes with venture capital has paid off, we now only invest in buyouts.
LocalTapiola Mutual Pension Insurance Company
• Invested assets: €10bn
• Members: 280,000
• Solvency ratio: 27% at the end of 2012
• Date established: 1962
We have been invested in private equity including direct non-listed investments since the 1990s, and our exposure has grown over the years. Close to 5% of our portfolio is allocated to private equity and it continues to be part of our long-term investment strategy.
The main reason for us to invest in private equity is its expected good returns – in absolute terms as well as in comparison with the risks. Investing in private equity is a long-term commitment, which suits a pension fund’s investment strategy well. It is also a way to diversify.
However, it is critical to undertake a prudent due diligence process when selecting a new private equity fund manager, which we carry out in-house.
Continued dialogue with managers, regular and personal contacts is essential in order to monitor performance in the management company and the underlying portfolio companies.
We are also on several advisory boards of our private equity funds.
In addition, being a member of the International Limited Partners Association gives us deep insight into current industry topics and the opportunity to communicate with our peers.
We primarily focus on the best returning segments of private equity, like growth markets and mid-market buyouts. We are invested in Europe and the US and in several funds globally. But we only select managers who are adding value to the portfolio companies and have proven operational skills.
We have also been actively co-investing with our managers and have had good relationships with our general partners (GPs). The GPs value our deep in-house private equity skills and experience, and our experienced in-house private equity team has built relationships with dozens of managers since the 1990s. Over the years we developed our internal investment process and have tried proactively to communicate with the managers.
Environmental, social and governance (ESG) concerns are emerging in the asset class, which is why we are constantly developing our ESG approach to private equity. We pay attention to ESG issues in the side letter but also encourage GPs to start quantifying and reporting the progress achieved in the various ESG areas.
Our investments have fulfilled all our expectations. To avoid a strong j-curve we have been investing in secondaries alongside the primary funds.
Interviews conducted by Nina Röhrbein