‘Systematic work’ on PE portfolio pays off for Finland’s Keva

Private equity is the best performing asset class for the €67bn Finnish pension fund, which says it is challenging 'old business models'.

Private equity was the standout performer yet again in the Finnish Local Government Pensions Institution’s (Keva) portfolio.

The €66.8 billion pension’s private equity portfolio generated returns of 48.3 percent in the 12 months through December, 36.7 percentage points more than the prior year, in which the asset class was also its highest achiever.

This was driven by “strong economic growth, the very good financial development of investees and a record number of breakaways”, Keva chief investment officer Ari Huotari said in a statement.

“The good return on private equity investments is the result of systematic work,” he noted. “The portfolio has been constantly and determinedly built up since back in the 1990s. For example, the average return on private equity investments over the past 10 years is 17.2 percent.”

Huotari added that valuation levels ticking up, as well as a strong sense of optimism in the market, boosted returns of the Keva’s private equity investments.

Private equity, including unlisted equities, accounted for 16 percent of Keva’s total assets as of end-December, compared with 12.3 percent in 2020. Its portfolio mainly consists of funds focused on financing start-ups and growth companies in Europe and the US, according to its website. Keva has backed funds managed by Apollo Global Management, Bridgepoint and Silver Lake, PEI data shows.

Huotari noted that the investor’s “successful strategy and adequate diversification combined with high-quality, responsibly-operating asset managers creating added value” as the basis for good performance.

Keva’s private equity team, led by senior portfolio manager Markus Pauli, has “boldly developed investment operations and challenged old business models”, the statement noted.

Keva recorded a total return of 15.8 percent across its portfolio last year or a record €9.1 billion return on investments, significantly higher than the 4.7 percent and €2.7 billion return posted in 2020. Listed equities generated a 19.9 percent return; hedge funds, 17.3 percent; real estate, 9.6 percent; and fixed income, 4 percent. Strong returns in the investor’s overall portfolio were driven by “growth in global stock markets as well as successful allocation choices”, Huotari noted.

However, uncertainty around the political situation in Europe, as well as the effects of inflation and higher interest rates are concerns for the investor, Huotari noted.

Several public pensions also reported a strong investment performance of their private equity portfolios in the last year, driven in part by the buyouts and growth portfolios. The California Public Employees’ Retirement System’s private equity portfolio averaged a 17.3 percent annual return on a three-year timeframe, and 16.5 percent and 13.9 percent annual returns on a five- and a 10-year time frame, respectively.

The State of Wisconsin Investment Board, meanwhile, outperformed benchmarks in all periods as of end-September 2021, with the private equity portfolio’s current return reaching more than $13 billion for the first time ever, affiliate title Buyouts reported. SWIB’s global private equity portfolio returned 54.8 percent at the one-year period, 20.5 percent over three years and 19.2 percent in five years.