Första AP-fonden (First Swedish National Pension Fund – AP1)
Year entered private equity: 2006
Investment strategy: Buyouts, Special Situations/Turnaround
Key officers: Jan Radberg, head of private equity; Johan Magnusson, CEO
Assets under management: $38.7 billion (SEK252.5 billion)
Target allocation to private equity: 5 percent
Number of GP relationships: 100
Web address: www.ap1.se
The funds currently limit private equity investments to 5 percent of assets. But Sweden’s government plans to ease restrictions to allow for more investments in private equity and infrastructure to boost returns.
More freedom for Swedish pension executives to invest in private equity could be an opportunity for US managers interested in courting Sweden’s national pension funds.
Of Sweden’s five pension funds, one of the most active private equity investors has been Första AP-fonden (First Swedish National Pension Fund), known as AP1. The fund has relationships with roughly 100 general partners, and has focused on buyout and growth strategies, as well as target turnaround and special situations funds. AP1 is one of five ‘buffer’, or sub-funds that exist to contribute capital to the state pension system at times when they need additional funds.
Jan Radberg, the head of private equity at AP1, told Buyouts that there are a lot of changes on tap for the pension system. But first, this is where AP1’s program stands today. Currently, the fund is targeting 5 percent invested capital in private equity, and is 3.5 percent invested. Swedish law today prohibits API from allocating more than 5 percent of assets into private equity funds.
“The portfolio consists of approximately 70 percent buyouts, 15 percent special situation/turnaround funds, and 15 percent venture capital/growth capital,” said Radberg. “From a regional perspective, 43 percent are North American funds, 37 percent European Union funds, 5 percent emerging markets and 15 percent global funds.”
As private equity investing is relatively new for AP1 (its PE program began in 2006), many of its commitments are new. Some of AP1’s holdings include ProA Capital’s Iberian Buyout Fund 1, Oaktree Capital Management’s OCM Opportunities Fund VIII, and Edelweiss Capital’s Special Opportunity Fund.
“The mandate for private equity is global,” said Radberg. “We currently make 10 to 12 new commitments per year and commit $600 million per year. The program amounts to a total of $3 billion of commitments.”
AP1’s interest in private equity has been growing over the past couple of years. Johan Magnusson, CEO of AP1, wrote in the fund’s 2013 annual report that AP1 has continued to increase its share of alternative investments, including private equity. “In accordance with our strategy, we have continued to diversify risks in the portfolio,” said Magnusson. “In the past year we increased our investments in real assets such as real estate and private equity funds, and reduced our investments in the listed equities and fixed income markets.”
New Rules Proposed
The Swedish government announced in March a proposal to give the national pension funds more freedom in their investment decisions.
The proposal followed an internal report that found Sweden’s pension fund performance was negatively impacted by the limitations on alternative investments. If limited partners had more leeway to invest in buyouts, infrastructure funds and hedge funds, they could have achieved stronger returns in the 1990s and early 2000s, according to the report.
More details about the proposal will be presented in legislation after Sweden’s national elections in September. But the proposal, which has the support of the sitting government as well as the opposition, has pension executives thinking about the possibilities of new markets.
“We anticipate a change in our investment restrictions. However it is still unclear what effects that will have and when it will be implemented,” said Radberg. “But if we may invest more money in private equity, we will obviously invest more in all (private equity strategies), all other things being equal.”
Other pension executives call the impact unclear. “It’s actually very hard to predict,” said Ulf Lindqvist, communications manager at the $3.3 billion AP6 fund, which has a 5 percent target allocation to private equity funds. “Will there be a greater flexibility to allocate capital in the new system? Yes. Will the new system allow greater flexibility for investing in private equity? Yes.”
Part of the government’s proposal is to reduce the number of buffer funds to three from five. It is unclear which funds would be absorbed.
“The proposal is that the three new funds will allocate according to a reference-portfolio, which will be decided by a sort of central-board,” said Lindqvist. “This reference-portfolio will serve as a guiding tool. One may say that there will be a greater possibility for investing in (private equity) funds, but that goes for the whole scale of assets.”
How System Works
AP1, along with AP2, AP3, AP4 and AP6, is one of the national pension system’s five buffer funds that manage the surpluses and deficits between paid-in pension contributions and pension disbursements.
The system consists of three parts: a general state pension, an occupational pension and a voluntary private pension. Every month, 18.5 percent of an employee’s salary is paid into the system, with 16 percentage points going to the income pension and 2.5 percentage points allocated to the premium pension.
In 2000, the Swedish parliament created new investment rules for the national pension funds, mandating the AP funds to manage their fund capital to generate strong returns on investments at a low level of risk. Indeed, alternatives started playing a bigger role in 2001.
Just as Sweden’s system agreed to add more exposure to private equity, new regulations could hinder the process. Indeed, the Alternative Investment Fund Managers Directive (AIFMD) has created some obstacles across Europe. Implemented into Swedish law in July 2013, the AIFM has made it more difficult for non-European Union GPs to court LPs in Europe.
The European Commission, which was seeking to regulate private equity and hedge funds within the European Union, introduced the AIFMD in 2011 as an extensive legislative initiative. It was created to increase the stability and transparency of alternative investments, but it has introduced a new set of cumbersome rules for non-EU GPs.
Non-EU based GPs face higher administrative costs to be in compliance and increased disclosure requirements, which leads to a more burdensome fundraising process. Also, non-EU GPs are expected to receive a “passport” to market to EU LPs starting in 2015.
Expect fund marketing to be a lengthy, costly process at least until that time. Still a trip to Sweden may be worth the effort.