Private equity tops Nordic LP returns charts

The latest round of interim reports released by LPs based in the Nordic region reveal a common theme – private equity is leading the asset class returns charts in the region. Indeed, the reports for the first half of this year demonstrate how private equity has developed into a success story for investors.

With the Nordic region one of the most established private equity markets, it has also become a successful and stable incubator for growth businesses. LPs recognise this and as such are increasingly making allocations to well-performing funds and co-investing alongside GPs.

According to Mark Bulmer, partner at Nordic Capital, LPs in the region are attracted to private equity because of the inherent transparency, low volatility of returns compared with public markets, and long-standing relationships. The firm’s latest fund saw a 70% re-up rate from its predecessor, as well as a geographically diverse set of new investors. As a result, it closed 23% above target at €4.3bn.

"It is notable that Nordic investors represent 18% of the LP investments in our latest fund, Nordic Capital Fund IX," he says. "We received an increased commitment in Denmark, which is attributable to our successful track record and Nordic Capital’s profile as one of the country’s most active investors, with more than €1.7bn invested to date in Danish companies."

LPs are increasingly focusing on fewer relationships, which may, in turn, draw higher allocations to selected GPs" – Mark Bulmer, Nordic Capital

Both Arbejdsmarkedets Tillægspension (ATP) – Denmark’s largest lifelong pension plan – and PensionDanmark highlight private equity as one of the best performing asset classes. ATP generated a DKK 4.1bn investment return from its entire portfolio for the first half of the year, according to its 2018 H1 interim report. Private equity was the best performing asset class over that period, returning DKK 1.8bn, including DKK 1.1bn returns from ATP Private Equity Partners.

The Hillerod-based pension fund had allocated 10% of its portfolio to private equity as of June this year. The pension scheme’s holdings in the asset class are valued at more than DKK 30bn, including DKK 7.5bn for direct investments and DKK 23bn for fund investments.

Meanwhile, PensionDanmark revealed a slight downturn in its interim results – the DKK 239.7bn fund announced a 4.2% investment return from its private equity programme for the first half of the year, down from 5.2% in June 2017. Private equity was ranked second only to real estate (4.4%), with infrastructure (2.7%) rounding off the top three best performing asset classes.

The Copenhagen-based pension scheme allocated 5.6% of its portfolio to private equity for members under the age of 41, and around 2.1% for members at the age of 65 (with the plan aiming for higher exposure to risky assets until members reach the age of 41).

Key economic contributors
Nordic Capital’s Bulmer highlights that allocations to private equity funds have increased exponentially in recent years, and this, he says, is ultimately down to the success that the industry has achieved. Nordic Capital receives support from local LPs not only on account of its performance but also because it is an economic contributor to the region, supporting the development of sustainable companies, some of which have gone on to become so-called "unicorns".

"We believe private equity allocations from Nordic LPs will continue to increase, not least because LPs are increasingly focusing on fewer relationships, which may, in turn, draw higher allocations to selected GPs," Bulmer says.

The region’s biggest economy, Sweden, reported that its Second Swedish National Pension Fund, known as Andra AP-fonden (AP2), generated 7.3% absolute returns from its investments in alternative asset classes including private equity for the first half of 2018. The SEK 352.4bn state-owned pension fund has increased its exposure to private equity over the past 10 years, and the asset class currently represents around 5% of the portfolio, up from 1% in 2008. On a shorter-term basis, Stockholm-based AP3 has also upped its exposure to private equity holdings from 2.9% in 2017 to 3.3% as of June 2018, equating to roughly SEK 12bn.

Returns will differ depending on the fund, but overall private equity has outperformed the public markets, and top performing GPs are likely to continue drawing LP interest.

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