AP3, one of the five buffer funds in Sweden’s national pension system, has indicated in its 2006 annual report that it is seeking to increase its allocation to private equity. The fund has so far committed 5.9 percent of its portfolio to private equity but has only invested 2.9 percent in the asset class.
Mikael Huldt, portfolio manager of private equity at AP3, says: “Our target allocation is to have 6.5 percent of assets committed to private equity within the next one to two years”.
The national pension system restricts investment in private equity to 5 percent of the AP funds’ portfolios, but AP3 pursues an over-commitment strategy. Explains Huldt: “We might have 6.5 percent committed to private equity, but perhaps only 4.5 percent would actually be invested because we would also be receiving back distributions.”
AP3 started to build an exposure to private equity in 2001 and has commitments to the asset class of about 5.9 percent of its portfolio. However, it has so far only invested 2.3 percent of its portfolio in private equity. It has no fixed allocation to the asset class, instead investing opportunistically.
The fund’s private equity team has created various layers of diversification in its investment strategy. Says Huldt: “One layer is geographic; we invest 30 percent in the Nordic region, 30 percent in the rest of Europe, and 40 percent in the rest of the world. This 40 percent has been predominantly in the US, but we have made some investments in Asia too.”
“Another layer of diversification is the type of fund; we invest 30 percent in venture funds and the other 70 percent in buyout funds. We back all types of funds except mezzanine.”
The biggest commitments in 2006 were to Priveq Investment Fund, IT Provider Fund IV and Ferd Private Equity Funds I and II, which each received SEK200 million (€21.6 million, $28.4 million).
AP3 has SEK212.2 billion under management. Another of the buffer funds in the national pension system, AP6, invests only in Nordic private equity but is substantially smaller than AP3. The five buffer funds are designed to meet the national pension system’s shortfall.