Pension funds seek more guidance on PE investment

Invest Europe has introduced a guide – which includes advice from Ilmarinen Mutual Pension Insurance Company, APG, SPF Beheer and Stichting Pensioenfonds TNO - to help pension funds investing in private equity better understand the asset class.

One-third of European pension funds want to increase their allocation to private equity over the coming years, but say that a lack of information on how to do so is holding them back, according to data published by industry body Invest Europe.

A survey of 38 corporate pension funds, 48 public pension funds and four other pension funds in the UK, Denmark, Germany, the Netherlands, Norway, Sweden, and Switzerland, undertaken on behalf of the group by Greenwich Associates, found many felt there needed to be more guidance on matters such as how to build a portfolio of investments, measure performance and manage risk.

“I would like an easier way to access general information,” one public pension fund which participated in the survey said.

Pension funds are an important source of capital for Europe’s private equity and venture capital funds, accounting for almost a third of funds raised over the last three years, according to Invest Europe data.

The most commonly-cited reason for pension funds to invest in the asset class was returns, according to the Greenwich Associates research, with the largest proportion expecting an outperformance of between 3 percent and 6 percent over public market returns.

As a result of the research, and to plug the knowledge gap, Invest Europe has launched its ‘Guide to Private Equity and Venture Capital for Pension Funds’. It contains information on why to invest and how to do so, plus an overview of the benefits and risks of gaining an exposure to private equity and venture capital.

Through cases studies, the pension funds indicate why they have chosen to invest in the asset class, how pension funds can manage their portfolios and exposure to private equity and venture capital. It also sets out the different points of access available to investors and outlines the areas pension funds need to consider, such as how to select managers and gain adequate portfolio diversification.

“We invest in private equity because we are looking for a premium over listed equities,” Katja Salovaara, senior portfolio manager, private equity, Ilmarinen Mutual Pension Insurance Company said in the guide. “To date, it has been our best-performing asset class, having achieved 17 percent net returns per annum since 2005 – ahead of the 300-500 basis points outperformance over the public market that we believe is an appropriate premium.”

Private equity has become increasingly attractive to institutional investors – including pension funds – as they seek returns in a persistently low interest rate environment.

“The long-term nature of the asset class offers [is also] a good match for long-term liabilities, while providing diversification benefits. Yet many pension funds find it challenging to source information about private equity and venture capital,” Iain Leigh, managing director, global private equity at APG Asset Management, said in the guide.

The guide also outlines what APG looks for in a GP. “We select managers based on analysis of a number of different factors, but the top items for us are the manager’s strategy, team consistency, composition and appropriateness for the strategy, a track record of value creation, fairness of economic terms, disclosure and transparency and finally, a strong culture in areas such as ESG,” Leigh said.

The guide is available on Invest Europe’s website.