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IPE special report May 2018

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PFA boosts private equity investment as risk-return profile improves

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PFA , Denmark’s largest pensions institution after ATP, has stepped up its investment in private equity in the first quarter, saying returns relative to risk are better in the sector than in the listed market.

Reporting returns for the first three months of this year, the labour-market pensions provider said investment returns fell to 2.8% before pensions tax (PAL) for unit link products, down from 3.7% in the same period the year before.

For with-profits pensions, however, investments produced a 4.0% return, up from 0.5% in the corresponding period in 2013.

Jesper Langmack, director and head of equities at PFA Asset Management, told IPE: “We increased our private equity because we see better risk-reward compared to the listed market.”

This year, PFA sold direct equity investments in health and roadside-assistance company Falck and commercial bank FIH at very good returns, he said. 

PFA invested in FIH in cooperation with ATP, and the two have also co-invested in DONG Energy. The DONG Energy deal, which also attracted funding from vehicles run by Goldman Sachs, was controversial at the time and led to a split in the coalition government. 

Langmack  was positive about the provider’s involvement in such deals alongside ATP. “As the leading investor together with ATP on the Danish market we get access to the best deal flow and normally exclusivity in the process, so we can de-risk the transaction in the process to minimise the tail risk.”

“Furthermore, our clients are moving from defined benefit to mark-to-market products, so the capital consumption is much lower, allowing PFA to buy more risky assets than before,” he said.

The investment deals with DONG, FIH and Welltec gave PFA a global footprint in the market, Langmack said, adding that this provided the institution with further access to good deals.

At the same time as expanding its private equity investment, PFA has increased its holdings in Danish equities, Langmack said.

“We are now the largest Danish shareholder on most Danish large caps,” he said.

As examples of this, he said the pensions provider now had DKK4bn (€536m) in Novo and DKK2.5bn in Mærsk.

“As well as this, we have increased our investments in high-dividend European equities to more than €1bn as part of our new strategy, producing high and stable returns of 6%,” Langmack said.

This year Danish equities had outperformed global markets by 17%, he said.

PFA also reported that contributions fell to DKK6.35bn in the first quarter from DKK6.67bn in the same period the year before.

The reason contributions were down year-on-year was in part due to the regulator’s announcement in the Autumn of 2013 that there would be new rules on the transfer of pensions from with-profits products to unit link pensions, it said.

This had kept the market for transfers on hold, it added.

The draft law on how transfer sums should be assigned came into force on May 15, 2014, PFA said, adding that the company has since re-opened the option for customers to switch savings internally from with-profits products to its unit link pension product PFA Plus.

Ongoing contributions, however, rose by nearly DKK200m in the first quarter compared to the first quarter 2013 to DKK4.48bn, 

PFA said this growth reflected the many new companies and organisations that had decided to switch to PFA as pension provider in 2013 and 2012.

Total assets slipped to DKK408.1bn at the end of March 2014 from DKK417.5bn at the end of December.

The solvency ratio increased to 254% at the end of the quarter from 240% at the end of 2013. 

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