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PE Firms lose allure in USD 150bn Swedish pensions market

Sweden’s state pension managers are looking for ways to gain more control over private equity investments rather than handing the business over to external buyout firms.

The AP funds that oversee Sweden’s pension wealth were this year freed to place up to 40 percent of their USD 150bn in assets in private equity. But the funds now want further adjustments to the rules to give them more freedom to sidestep PE firms and avoid high fees.

"Under the present legislation, private equity investments get very expensive," said Niklas Ekvall, chief executive officer at AP4, one of the four so-called buffer pension funds affected by the new rules.

Sweden adjusted its rules governing the state pension funds at the start of 2019, to help the industry generate higher returns against a backdrop of record-low interest rates.

The change means that the AP funds can place about 40 percent of their portfolios in less liquid assets such as private equity and real estate. Though such assets are generally deemed riskier, the long investment time horizon of the pension industry means that liquidity is less of a concern.

But demand for such alternative assets has soared lately, driving up prices.

Meanwhile, the high cost of using private equity firms to manage such investments has become increasingly controversial, given the high fees. Norway’s USD 1trn sovereign wealth fund, for example, has been banned from investing in private equity due to the costs.

Ekvall says the fees are typically 2 percent to 4 percent. He also points out that using external managers doesn’t allow his fund to take advantage of its position as one of “the most long-term investors you can find.”

AP4 has proposed that it be able to own as much as 50 percent in a private equity investment vehicle, more than the 30 percent the government has suggested. The legislation will be decided after June and implemented by early next year.

Ekvall says AP4 isn’t planning to abandon traditional private equity funds completely since many of them are "very good at what they’re doing.”

Infrastructure

The four AP funds together now have about SEK 55bn invested in private equity, with returns last year of 12 percent to 24 percent.

They are also branching out into other so-called alternative assets. Together with two other AP Funds, AP4 recently announced it was starting an investment company called Polhem Infra, to target investments in unlisted Swedish infrastructure projects.

And they want to target other asset classes besides real estate through the same sort of long term co-ownership ventures.

Much like many of his peers, Ekvall says he’s not a big fan of hedge funds, though AP4’s allocation to such external managers has remained stable at around 3 percent - 4 percent of the portfolio.

"We see them as a pure alpha generator on top of the base allocation," he said, referring to returns that beat the benchmark.

Overall, AP4 isn’t expecting big returns in stocks in the period ahead. It’s scaled back its position to neutral from a slight overweight over the last few months amid trade war concerns.

“Discussions on the U.S-China trade situation will continue and the question is if it’s going to move over to Europe,” he said.

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