Late last year, Private Equity International asked Skandia Asset Management’s Daniel Winther what one change he would like to see in the private equity industry. The Swedish insurer’s head of private equity and infrastructure didn’t mince his words.

“GPs investing in private markets should remain privately owned,” Winther said. “Listing publicly, or selling out control of the GP, severely hurts the interest alignment with LPs.”

At least seven alternatives managers have either gone public or have been rumoured to be mulling listings over the past year. Antin Infrastructure Partners listed in Paris in September, US giant TPG went public in New York in January, and PEI Media owner Bridgepoint listed last July. Dyal Capital Partners merged with a special purpose acquisition company to form Blue Owl Capital in May last year, also listing in New York. Meanwhile, Ardian, CVC Capital Partners and Clearlake Capital are either considering an IPO or are reported to have been pitched by bankers to be taken public.

It’s against this backdrop that PEI sat down in April with Winther for a more in-depth conversation. With roughly SKr600 billion ($59.7 billion; €57.3 billion) in assets, Skandia Mutual Life Insurance is no small fry. Its asset management unit is viewed as an influential and thoughtful LP with deep pockets.

“They’re thought leaders in the Nordic market,” says a GP that manages capital for Skandia. “I know a number of LPs who call on them for thoughts and to compare notes on private equity firms.”

The week before our conversation, Asia-Pacific-focused alternatives firm PAG had filed for an IPO in Hong Kong, while the week prior it was reported that CVC had chosen Amsterdam’s Euronext exchange for its public listing. While Winther didn’t mention any GP in particular during our interview, his general view is that, because of the potential for misalignment that comes with listed GPs being more focused on growing assets under management and management fee streams than maximising the value of a fund portfolio, Skandia would rather not take that risk.

To Winther, the thought of a GP – which inherently champion the private equity model of ownership – itself becoming a public company is anathema to the industry.

“It’s a fascinating paradox,” Winther says. “You made your success investing in unlisted companies, but you yourselves are so fascinated about becoming listed.”

What makes private equity the superior model of ownership? “You don’t have the shareholders, you don’t have the quarterly reporting, you don’t have all the compliance,” Winther says. When listed, you don’t have a majority – you have different shareholders with different incentives, he adds. “You have so many other things that distort you from making great investments.”

Daniel Winther of Skandia
Daniel Winther, Skandia

“It’s a fascinating paradox. You made your success investing in unlisted companies, but you yourselves are so fascinated about becoming listed”

One GP that Skandia has backed is EQT, the largest private equity firm headquartered in Europe, according to this year’s PEI 300. Skandia notably committed to EQT’s first fund in 1995.

What is Winther’s opinion on the fact that EQT is now a public company, having listed in Stockholm in 2019? “We have given them feedback on what we think,” Winther says. He declines to comment on whether EQT is an active GP relationship; suffice to say that Skandia does have exposure to the manager.

To be clear, Winther doesn’t see GPs going public as a black and white situation. Listed GPs may well deliver outperformance and be aligned with their LPs; Skandia would simply rather not take on the potential risk to alignment, no matter how small.

Market observer

Skandia, which operates under a life insurance structure and is in fact a private pension manager, has been a cornerstone LP or founding partner of some of Europe’s best-known GPs, including Nordic Capital and IK Investment Partners. With average ticket sizes in buyout funds of around $100 million, and $25 million to VC managers, its portfolio today counts firms including Platinum Equity, General Catalyst and FTV Capital. It has committed to funds managed by Ardian, Sofinnova Partners, TDR Capital, Hg and Arsenal Capital Partners, among others, according to PEI data.

Compared with some of its peers, Skandia is in an enviable position. Its buyout portfolio delivered a 72 percent internal rate of return last year and was worth around SKr53 billion by the end of December, according to materials from the insurer. Its private equity portfolio overall, comprising buyout and venture capital, delivered an 89 percent return.

From an outperformance point of view, Skandia’s buyout portfolio beat its public market index by 10 percentage points as of Q2 2021, maintaining a similar level of success across the second half of last year; its venture portfolio beat its index by even more.

What went right in Skandia’s portfolio last year? “I can’t really explain where the performance comes from,” Winther admits. His eight-person team can sometimes spend two weeks trying to understand what drove a particular performance, he says, conducting analysis on sector exposure and strategies, and still only understand a portion of what’s driving that particular trend.

“It’s very hard for an LP to understand what’s going on at different levels with all the creativity going on with leverage,” Winther says. The proliferation of credit lines, bridge facilities and NAV loans means figuring out whether a GP’s performance is down to skill or luck can be a particularly frustrating exercise.

“How much is from operational value-add; how much is from multiple appreciation; how much is from leverage? It’s very hard [to ascertain]. Money just flows from different vehicles,” he says. The definition of “contributed capital”, for example, can differ among managers. “It’s really tricky to understand who’s performing and who’s not performing.”

Still, Skandia is clearly doing something right. It prides itself on GP selection, being disciplined on re-ups and on seeking well-performing managers.

“They [Skandia] do a deep quantitative and qualitative analysis, but then combine that with pragmatic business judgment,” says Robert Klap, managing director at Platinum Equity. “They are also very responsive and have a wonderfully unpretentious and laid-back style.”

Skin in the game

The Institutional Limited Partners Association’s attempts to standardise limited partnership agreements and provide templates for GP reporting has been helpful to Skandia, says Winther, adding that a “fair share” of the insurer’s managers use ILPA templates when reporting.

Where reporting can go a little overboard is in the area of diversity, equality and inclusion, Winther says.

“For a European, it seems like a very American approach to drive equality,” he notes, adding that Excel templates that encourage GPs to disclose employees’ skin colour and ethnicity are counterproductive. Winther cites one template that included a category for Alaskan Indian Native as a step too far. “They try to break down all those minorities. In Sweden, it’s prohibited by law to track people’s skin colour. You can’t do it. It’s breaking the law.”

Have industry efforts at promoting DE&I gone too far? “It’s shooting completely in the wrong direction,” says Winther. His own team comprises six men and two women and, in a recent recruitment process, he says he focused on the “best CVs” as opposed to specific ethnicities, gender or sexual orientations.

“I’m not in favour of hard targets. I’m for creating equal opportunities, supporting women in the midst of their career when they have a child, supporting female forums where they can network and build networks together. But I’m not in favour of managing the decimals on the outcome side of things. I think it’s counterproductive in the long run.”

Forging its own path

One clue to explaining Skandia’s PE portfolio performance lies in what market sources say is the investor’s disciplined approach. Skandia isn’t the kind of investor to jump on the bandwagon of the hottest investment strategy of the month – instead, it sticks to what it knows, focusing on being disciplined with re-ups, and seeking well-performing managers.

“They don’t just go with the flow, they’re not followers – they work hard to develop a strong conviction and are willing to make well thought-out, well diligenced bets,” says Karen Derr Gilbert, a partner at San Francisco-based growth manager FTV Capital, which Skandia has backed consistently since its 2007-vintage FTV III fund.

According to Winther, the pillar of Skandia’s investment philosophy is not to be opportunistic, and this approach has served the institution well.

“Being opportunistic to some extent means grabbing an opportunity in the moment. Since we’re dealing with five-to-10-year perspectives, it’s really hard to understand if some kind of strategy, sector or geography is in a position to perform better than another over the next five to 10 years. That’s just an impossible starting point.”

This means that Skandia has little enthusiasm for first-time managers – the risk/reward balance is better in a Fund II, and even then, Skandia prefers to be a Fund III or IV investor, Winther says. When it comes to newer strategies such as impact funds, the investor is in wait-and-see mode.

For the time being, Skandia is content with the exposure to so-called “impact companies” it gets via its private equity portfolio – life science assets via its VC managers, or education and healthcare investments via its buyout managers, for example.

“It comes down to the question: is there a specific value-add, structural and sustainable [element] going forward in how they operate as an impact investor?” says Winther about dedicated impact funds. “Do they have enough value-add to really make anything out, get some alpha around their strategy, rather than just putting portfolios together with nice companies? For us, that doesn’t do the trick.”

Secondaries sceptics

Like many investors in today’s fundraising environment, Skandia is no stranger to GP-led secondaries opportunities. In these processes, a GP typically moves an asset, or multiple assets, out of an existing fund and into a continuation vehicle, giving LPs in the original fund the option to sell or roll their exposure. The market for continuation funds was worth $63 billion last year, according to research by Lazard, and some expect the total secondaries market to be worth $2 trillion by 2030.

For its part, Skandia is sceptical of continuation fund transactions.

“For me, that translates into there’s a big chunk of money left on the table for LPs that they hand over to someone else. We don’t want to support that phenomenon,” Winther says. Skandia would be supportive of processes that involve well-performing managers who have a valid reason for wanting to conduct such transactions, provided there’s a good roll alternative, a good sell alternative and the price is seen as fair.

“If it’s properly done so that it really is about riding that winner [for] four or five more years, then I’m in favour of that,” he says. “[But] we’ve seen situations where the price is obviously not fair, where they could have sold an asset for a higher price, but they decided to roll into a continuation fund at a lower price,” he says, adding that Skandia has mostly sold in continuation fund processes.

“For us, we’re always trying to understand to what degree they take their fiduciary responsibility seriously and their degree of ethics and ethical compass internally. If they do something like that, what does that tell you about the GP in a wider perspective?”

The Skandia of future years is likely to look very similar to the Skandia of today: Winther’s team has an annual budget for its buyout portfolio of around $750 million, and it doesn’t have plans to significantly increase this. It also has no immediate plans to grow its team, Winther says. Instead, infrastructure is where Winther’s team plans to increase allocations: to 4 percent of Skandia’s balance sheet, from 3 percent today.

For now, this Scandinavian investor appears happy to sit back and watch as the trends of the day play out, while sticking to its core investment beliefs and trying to identify three or four new GPs a year that it believes will deliver outperformance based on skill, process and repeatability, rather than on luck.

“I’m sad that you’re publishing a story on them,” jokes John Kim, managing director at General Catalyst, commenting on PEI’s decision to write a profile story about the Swedish insurer, which it views as the “best of the best” when it comes to limited partners. “They’re such a huge investor… Now the entire world is going to know about them.”

How Skandia co-invests

The LP approaches co-investments with pragmatism, assessing each potential opportunity on its own merits

Skandia doesn’t have a dedicated private equity co-investment team. Instead, the individual GP relationship manager is responsible for evaluating any co-investment opportunities. Winther’s team sees between 10 and 15 deals every year. First, it decides whether it views the potential transaction as a deal aligned with the given GP’s area of expertise. If a consumer-focused GP is thinking of buying a tech business in a geography in which it has no expertise, Skandia isn’t going to co-invest.

Next, Skandia will look at the specifics of the target company, without attempting to undermine the GP’s analysis. “We are very good [at] selecting GPs; we are not investors,” says Winther. “We’re not trying to second guess what they say, but we try to understand risk/reward, downside/upside, leverage. Is it expensive? How do the profits look?”

Lastly, Skandia applies its ESG filter.

Typical processing time is around two weeks. Skandia co-invests in between four and six deals each year, with a sweet spot of around $25 million. It has completed around 35 deals so far, which have generated 4-5 percentage points by internal rate of return above its fund investments.