Swedish pension funds to increase PE allocation

The Swedish government’s buffer funds, which underpin the country’s pension system, want to plough more money into private equity after the asset class helped them generate strong returns in the first six months of 2007.

One of Sweden’s biggest state pension funds has pledged to increase its allocation to private equity, after strong returns from the asset class boosted its assets under management by 7 percent in the first half of this year.

AP3, one of the five Swedish “buffer funds” formed in 2001 to offset deficits in the country’s pension system, said assets under management grew by SEK15.5 billion to SEK227 billion (€24.2 billion; $33.0 billion) in the six months to June, with a total return of 6.8 percent.

The results were boosted by the performance of its private equity portfolio, which generated a first-half return of 15.5%. AP3 made 13 new fund commitments during the period, totalling SEK 2.8 billion. It has now committed a total of SEK 13.8 billion to private equity across 85 funds, of which SEK 6.6 billion has already been invested.

Under the rules established by the government in 2001, AP3 has a strict limit on the amount it can invest in unlisted equities. A spokeswoman for AP3 told PEO: “At the moment 3.6 percent of our assets are in unlisted equities; we can have a total of 5 percent, and we want to get close to that.”

Furthermore, AP3 is hoping that the government will review this restriction with a view to increasing the limit beyond 5 percent. The fund is particularly interested in increasing its exposure to infrastructure assets, which are currently classified as unlisted equities.

AP1, another of the five funds, also reported strong figures this week, with assets up SEK14 billion to SEK221.1 billion, and a total return of 6.3 percent. This included a 15.1 percent return from its Swedish equity investments, which performed particularly well during the period. Its alternative investments, including a private equity mandate which has just been outsourced to advisory firm Hamilton Lane, returned 10.3 percent.

Last year Sweden’s five buffer funds made combined returns of SEK 83 billion, of which AP3’s share was SEK 19 billion. As a result, the pension system was in surplus by 1.49% or SEK 100 billion.