The highs and lows of private equity

Peter Borgdorff
Executive director
Pensioenfonds Zorg en Welzijn (PFZW)
• Invested assets: €110bn
• Total members: 2.4m
• Industry-wide DB scheme for workers in the care and welfare sector
• Solvency ratio: 97%
• Date established: 1969

We have been investing in private equity for about 15 years. We started our investments collaboration with the Dutch civil servants pension scheme ABP through a vehicle called AlpInvest in 1999.

Private equity is an interesting source of profit and offers diversification to our total portfolio.

However, there have been discussions about the sustainability of private equity investments, especially those that are short term. We are clearly not a short-term investor - we invest for a minimum of six years.

At the moment, €7.5bn of our overall portfolio is invested in private equity.

The majority of that is still invested via AlpInvest with ABP but last year we added a new private equity mandate with our service provider PGGM.

We never directly invest alone in companies. The investments are always undertaken by a private equity fund because we do not feel we have the knowledge to make direct investments on our own. Of course, the costs are higher when you invest through funds but they also pose less risk.

We mainly invest in funds with a small allocation towards venture capital. Most of the investments are located in the US and Europe.

We generally do not have any investment themes in our private equity allocation. Clean tech would fall into our environmental, social and governance (ESG) portfolio. However, we have a small venture and growth capital mandate in healthcare.

To date, our allocations to private equity have proven to be good investments, with returns ranging from 7% to 30%, depending on the individual year. The private equity portfolio’s return for 2011 was €500m of the total €7.5bn, around 7%.

Costs are the main issue with private equity. Is the profit high enough to compensate for the fees due? As long as there is a balance between the cost and the profit, we will continue to invest.

Another challenge is finding investments that will not destroy but build society. It is not good behaviour to invest only for the money - we also want to make sustainable investments for a sustainable society. As long-term investors, we pick private equity funds based on their long-term, not short-term behaviour.


Mattias Berntsson
• Invested assets: SEK18.5bn (€2.1bn)
• One of the six Swedish national pension buffer funds
• Closed end fund with no payments from or disbursements to the pension system
• Date established: 1996

Historically, AP6 has invested in a mix of publicly listed and private equity. But, going forward, the strategic focus is purely on private equity geared towards the Nordic market.
We combine direct investments primarily in Sweden - where we focus on growth investments and small cap buyouts - with indirect investments in the Nordic region. These are managed in-house.

In the past, we have been overweight on the direct side. Over time, we seek a balance between direct and indirect investments. On the indirect side, we see good opportunities in the Nordic region. Norway and Finland, for example, are catching up fast. These markets have interesting dynamics and are not as fiercely competitive as Sweden.

The indirect core portfolio concentrates on primary fund investments in the mid-market and large buyout space but we increasingly see and seek opportunities in secondaries and co-investments too. On the indirect side, we are overweight mid-market and large buyouts but the portfolio also includes a few venture investments, which is an area we are highly selective in because in terms of risk-adjusted returns the overall venture market has not performed according to expectations.

For us, private equity is all about enhancing returns and we believe the asset class provides a great addition to the overall pension fund system. Recently, we created a new return target for our portfolio, which is a broad Nordic listed market index plus a private equity risk premium of 250 basis points, which takes into account our internal liquidity management. Over 15 years, our compound annual growth rate has been 3.9%. On the more mature side, returns have exceeded 15% while the returns on venture investments have been significantly lower.

One of the major risks in private equity is liquidity. Investors need to be careful in planning the liquidity in order to avoid a fire-sale of assets in a down market.

We try to differentiate between investment activity and liquidity management - on the one hand we are making long-term investments in highly illiquid assets, and on the other, we are managing a cash portfolio where we try to take as little risk as possible and which is ready to invest at short notice.

We are coming across more opportunistic private assets, such as real assets, special situations such as distressed or sector focused strategies.

Jens Henrik Staugaard Johansen
Managing partner, PKA AIP
• Manages five pension funds after the merger of four funds into one in 2011
• Invested assets: DKK160bn (€21.5bn)
• Participants: 250,000
• DC schemes with a secure level of guaranteed pensions
• Date first PKA scheme established: 1954

PKA’s early private equity investments date back a decade. However, the fund programme only sped up from 2006 onwards.

Currently, we have a private equity portfolio of DKK12bn (€1.6bn) but have larger commitments outstanding.

We are set to commit a further DKK12bn to private equity, infrastructure, timber and agricultural assets over the next three years, and on top of that an additional DKK5-10bn solely to infrastructure, of which DKK2.5bn has already been assigned to a windfarm.
We invest in private equity for high risk-adjusted returns. We expect the asset class to generate double-digit returns and the average year-to-year net asset value (NAV) has met these expectations.

However, with private equity, some of the early year returns are diluted by the fact that once you invest a lot of money it takes some time before the value creation becomes apparent on the books. Because we have committed significantly more over the last two years we are not at a stable level yet where our returns have also reached maturity.
The bulk of our private equity exposure is through funds. Given the size of our mandate we consider fund investments, which allow us to access lower mid-market deals, the most efficient way of deploying capital.

Mid-market buyouts dominate our private equity deals but recently we also agreed a buy side deal in the technology space. We make use of fund of fund investments where we think they give us access to markets we would otherwise not be comfortable in, where there is a strategic fit or an ability to leverage on the knowledge that we get through collaboration with those fund managers, for example in Asia.

We have a global mandate in private equity; however, most of our allocation is in the US.
The main risk in private equity is alpha linked to the manager selection process. But as long as we commit to those who can grow businesses, they will create value despite a lack of leverage and lower IPO multiples.

PKA has set up a sub-division called PKA AIP that deals with all alternative investments structured as an external service provider. It is designed to run the portfolio more efficiently than in the past. Apart from the Danish Labour Market Supplementary Pension ATP, few other Danish pension funds currently have separate entities for their alternative investments.