DENMARK - The ATP pension fund has only invested around half of the amount in private equity it originally intended seven years ago, largely because of the unexpectedly high volume of due diligence work it has had to do.

Bjarne Graven Larsen, chief investment officer at the DKK 445bn (€59.6bn) fund, told IPE another factor which has forced the labour market supplementary fund to scale down its initial plan was the decision not to focus heavily on large buy-out funds.
"We have only invested DKK14bn, and that's probably about half what we originally thought," said Graven Larsen.

"We said in 2001 that our aim was to invest DKK25-30bn in private equity. We said we didn't have a special timeframe, but we thought it might take five or maybe seven years. Now it is seven years later and we have invested DKK14bn.

"One very important explanation is that we realized the amount of due diligence we had to do was more than we had originally thought, including all the analysis," he said.

The onerous procedures involved include going to visit the managers several times, he added, and getting 25-30 references for the people at the management fund, to find out, for instance, if any of the partners have a criminal record.

ATP could perhaps have boosted the capacity of its specialist private equity unit, ATP Private Equity Partners, which was established in 2001, by increasing the number of staff. But the pension fund consciously chose to avoid this route, according to Graven Larsen.

"We said from the beginning we were going to build an organization with 16-20 people, and we wanted it to be kept small. We feared the dynamics would change if you build an organization of 50 people.

"There are no fund reporting people - we wanted a small organization where the brotherhood was just investment people," he said.

It also decided against stepping up the volume of investment in private equity by weighting investments towards large individual stakes.

"The analysis was if we decided to increase the size of investment, it would have only been possible in large buy-out funds, but not in the venture funds," he said. "If we did this, the consequences would have been that large buy-out funds would have been a much more significant part of our portfolio.

"We simply decided it was better that it takes a longer time to build up the portfolio, because we did not want to compromise the quality," he said.

However, the slower-than-expected pace of investment in private equity funds is only part of the reason why ATP has so much less exposure to the asset class than it had anticipated. The return of capital from the funds has been surprisingly swift, Graven Larsen explained.

"The funds we invested in - within the first portfolio of ATP Private Equity Partners I K/S - started to return funds much sooner than expected," he said.

"We had expected that after three years, for every DKK100m, 80% would be involved, but that proportion came down to 50%.They started to return capital very quickly. So because of the success of the fund in terms of return of capital, this has meant we haven't invested as much as we expected to," added Graven Larsen.

That said, ATP PEP is now having a higher success rate in terms of completing investments following initial contact.

"Last year, we had meetings with 370 funds, and we only took 32 into due diligence; we turned down 90%. Of the 32 funds, 22 actually turned into real investments.

"That was a higher success rate than in any of the previous years; the reason for that is that now we are often investing for a second time in funds, so they tend to have a higher success rate," he said.

But Graven Larsen is not at all worried the fund's private equity exposure is smaller than it had planned.

"We always said to the team they should never feel the pressure to invest too fast. It's different from the way we had planned, but it's a much better position to be in."

In any case, ATP made some changes about a year ago which should allow investment to expand. "We have included secondary funds, and we have started to do co-investments in the US, whereas before we had only done these in Europe.

"And we have allowed for a larger size of investment - instead of investing €75m in a specific fund, we decided it was OK to go up to €100m in a single fund. It's not a limit," he pointed out, "we can deviate from that, but it's a guideline."

ATP revealed last month it had seen a return of 8.7% or DKK9.4bn on its "equity risk", which invests in domestic, listed overseas as well as private equity. (See earlier IPE story: ATP warns of 2008 equities wipeout)

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email