Stockholm (HedgeNordic) – Historically, US pension funds had larger allocations to alternatives but Europe may be catching up: as of 2018, European pension funds had 27% in alternatives, almost matching the 31% seen in the US, according to the 2020 report on pension funds by the Association of the Luxembourg Fund Industry (Alfi) and published by PwC Luxembourg. (The percentage allocations were much lower in Asia at 8% and Latin America at 5%).

Within Europe, the largest allocations to alternatives were seen in Germany at 40.6%, Switzerland at 35.3% and the UK at 31.9%, but preferences for different types of alternatives vary between countries – with more appetite for venture capital seen in the Nordics.

These figures are also a moving target. The Swedish Government AP funds can now invest up to 40% in illiquid asset classes, which should eventually give them some of the largest weights. The ALFI report found that European pension funds in general were allocating more to real estate, private equity, private debt, infrastructure, as well as forestry and farmland.

The Swedish Government AP funds can now invest up to 40% in illiquid asset classes, which should eventually give them some of the largest weights.

Many insurers in the Nordics have been steadily growing their allocations to alternatives for a number of years. Numerous Nordic pension funds, banks, and funds of funds, are regularly announcing and tendering mandates to invest in these areas. Some of them run programmes allocating to different vintages every year.

Multiple Mandates up for Grabs

For instance, Danske Bank and its Danica Pension are investing in private equity, infrastructure and private debt, via funds and co-investments. Commitments are around EUR 100 million per fund. The firm invests across private equity buyouts and in private debt the focus is on mezzanine, direct lending, distressed debt, infrastructure debt, fund of funds and special situations.

Denmark’s DKK 110 billion Lærernes Pension public pension fund, for doctors, is adding to a wide variety of alternatives, according to Preqin. In private equity it is looking for European buyout funds. In real estate it seeks investments in the Nordics and in North America. Its infrastructure programme will include renewable energy and digital infrastructure in Europe, while forestry looks further afield to Australasia (Australia and New Zealand) and North America. Its private debt programme looks at distressed and sustainable debt, in West Europe and North America. Ticket sizes are usually between USD 30 million and USD 60 million.

In Finland, public pension fund Keva runs over EUR 50 billion and its planned additions to alternatives allocations run the gamut from buyout, distressed debt, funds of funds, mezzanine, secondaries, special situations and venture capital, to real estate fund managers, direct hedge funds and funds of hedge funds, infrastructure and private debt.

Multi-Managers, Collaboration and Club Deals

The largest pension funds will often invest directly into private markets funds while smaller ones – as well as private banks and high net worth individuals – are more likely to outsource to multi-manager groups. The region has private funds of funds managers, such as Coeli Asset Management in Sweden, eQ Asset Management in Finland, Cubera Private Equity in Norway, and Saga Private Equity in Denmark, which are all seeking private equity funds, including growth and buyout funds.

Some investors are joining forces either to set up their own specialized asset managers, or to make larger investments.

Some investors are joining forces either to set up their own specialized asset managers, or to make larger investments. Danish pension funds, PKA and PenSam, set up joint venture, AIP, to invest in infrastructure, and have in 2020 been joined by Storebrand Asset Management of Norway. The trio are investing into an energy transition fund that could manage up to EUR 4 billion. Five Danish allocators – Laegernes Pension Fund, P+, MP Pension, the Lars Larsen Group, and Novo Holdings – formed the Danish Investment Club, managed by Advantage Investment Partners, and have committed DKK 3.11 billion (USD 500 million) to ISQ Global Infrastructure Fund III.

Cooperation across borders has also been seen with Lærernes Pension and Pension Danmark of Denmark, joining KLP of Norway, to invest in Copenhagen Infrastructure New Markets Fund. KLP has also joined up with Sweden’s Folksam to invest EUR 1.2 billion in Brunswick Real Estate Capital III, a senior debt fund that targets sustainable investments in commercial property in growth regions.

Venture Capital

In the Nordics there is a strong appetite for alternatives right across the risk spectrum, and government sponsored funds are sometimes invested in more early stage, venture capital strategies, in the spirit of public/private partnerships.

The European Investment Fund (EIF) is Europe’s largest investor in venture capital, but Nordic pension funds are also very big players making up 16% of European venture capital fundraising since 2013, according to “The state of European Tech” 2019 report by Atomico. This is quite impressive when the four Nordic countries’ population of 27 million is only about 5% of the EU population of 445 million. Nordic pension funds have a far greater appetite for venture capital than do those in Germany, Austria and Switzerland. Sweden’s AP6, which is dedicated to unlisted companies, has helped to seed VC funds such as Cerandum, and also makes direct coinvestments.

Green and Clean

Green investments are naturally becoming an important theme for earlier stage funds. The Antler Nordic fund has just raised USD 36 million for its first venture capital fund, devoted to sustainable technology companies. The investors included Norwegian wealth manager Kistefos, as well as two government investors: the Danish state fund Vækstfonden, and the Norwegian state fund Investinor. Another Norwegian government body, Norfund, has committed to Openspace Ventures III, focused on B2B and B2C in South East Asia. Elsewhere in Denmark, The Danish Government’s Green Future Fund has allocated to the 2150 Tech Sustainability Fund, which was co-founded by former Facebook executive, Christian Hernandez, and was incubated by Danish real estate company, NREP.

Nordic allocators want to be at the leading edge of technology in general and of course green and clean tech in particular.

Nordic allocators want to be at the leading edge of technology in general and of course green and clean tech in particular – and they are investing across the range of alternatives, from infrastructure debt in renewable energy often with a low single digit return target to venture capital targeting returns above 20%.

This article featured in HedgeNordic’s “Private Markets” publication.