LP Profile: Ilmarinen

Over the past few years, co-investments have become more common in the Nordic region – not least in conjunction with infrastructure investments, but increasingly also in a private equity context. The private equity team at Ilmarinen Mutual Pension Insurance Company (Ilmarinen) is no stranger to this trend.

Ilmarinen has invested in private equity funds since the second half of the 1990s, but co-investments only started in 2010, as part of the insurer's new five-year strategy. In that time frame, the team participated in 18 co-investments, with a current market value of around €260m. "With a 14% net IRR, these investments have been positive contributors across our PE portfolio," Räsänen says.

"The rationale behind moving into co-investment was largely coupled with speeding up allocation to the PE asset class that was growing as part of the 2010-15 strategy," Räsänen explains. Rather than being called by a fund to commitments over a three- to five-year period, the allocation could be made more promptly, which sped up the overall private equity portfolio allocation according to Ilmarinen's targets.

"To some extent, cost efficiency considerations can bring upside and an improved control of the investment. Also, insights into a specific GP's work with a portfolio company, not least in light of potential future commitments to the GP's funds, have been highly valuable," Räsänen says.

The rationale behind moving into co-investment was largely coupled with speeding up allocation to the PE asset class that was growing as part of the 2010-15 strategy" – Mikko Räsänen, Ilmarinen

According to its new 2020 strategy, the insurer targets a 7% allocation to private equity investments, of which 2% is tagged for co-investments and direct investments.

Ilmarinen is largely geared towards making co-investments internationally, without a specific sector focus. The thinking is more thematically driven than industry-specific, according to Räsänen, with fund managers expected to deliver added value regardless of business cycles. Geographically speaking, although European investments weigh the most, the insurer has also taken part in transactions both in the US and Asia.

Co-investments typically involve an investment to the tune of €20-30m, excluding the capital channeled through the GP's fund.

Leveraging GP relationships
The investment cases are identified through key fund managers, which by and large constitute the largest 15 GPs that Ilmarinen has committed funds to. According to its 2014 annual report, some of the largest commitments over the years have been made to funds managed by Nordic Capital, Apax, KKR, Cinven and Permira. While the insurer does not exclude the option of stepping outside this circle of familiar asset managers, Räsänen acknowledges that fund managers tend to test their LPs' appetite for a co-investment case at first hand, and that a case arriving to investors from an unfamiliar fund manager may be frowned upon.

Ilmarinen does not publicise its co-investment deals. According to unquote" sister product Mergermarket, Ilmarinen's co-investments include Norwegian software and accounting specialist Visma in 2014. The insurer also participated in a Nordic Capital-backed consortium bidding for Danish payment services company Nets in 2013-14, ultimately acquired by another group of co-investors including Advent International, Bain Capital and Danish pension insurer ATP.

Where fund investments require a sound understanding of the manager, co-investments skew the know-how towards the portfolio business" – Mikko Räsänen, Ilmarinen

Besides fund investments and co-investments, Ilmarinen also makes direct investments, mainly in private Finnish companies, securing stakes of 10-20%. Excluding infrastructure investments, such as electricity transmission company Elenia, the direct investment portfolio has a market value in excess of €100m. Cinia, Mediverkko and Ekokem are among the direct investments made by Ilmarinen in recent years.

In terms of investment terms and rights, such as being tagged or dragged along to an exit, "there will obviously be more headroom to negotiate around direct investments," Räsänen says. At the same time, a good fund manager will negotiate attractive terms with the operational management of the company that are adopted by the minority shareholders. "Thus, from our perspective to classifying risks, we are comfortable in putting the three private equity investment types – funds, co-investments and direct investments – on the same par," says Räsänen.

The growing complexity associated with private equity investing is presenting new challenges to Räsänen's team. "Where fund investments require a sound understanding of the manager, co-investments skew the know-how towards the portfolio business, with direct investments requiring skills purely honed in on managing a private company," Räsänen says. "It's perhaps telling that our latest recruit, Ilja Ripatti, arrived with a strong understanding of corporate analysis, primed for co-investments and direct investments."

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