AP7, Sweden’s largest public pension, has been exploring how it could increase its exposure to private equity and begin investing in other alternative asset classes.
The SKr655 billion ($73.9 billion; €63.3 billion) institution is awaiting the conclusion of a government review that could allow the pension to increase its unlisted assets target to 40 percent from 4 percent, Per Olofsson, AP7’s head of alternative investments, told sister title Private Equity International.
“Today we only have private equity but we are exploring ways to diversify the portfolio into infrastructure, real estate, private debt,” Olofsson said. “Even if we don’t get the green light on this [from the government], from what we’ve learned so far, we may expand into other strategies.”
The Swedish government had said in 2017 it would allow its so-called “buffer” pension funds – AP1, AP2, AP3 and AP4 – to allocate up to 40 percent to unlisted assets, up from the current 5 percent limit.
For AP7, reaching the 40 percent target exposure would take many years, and even if the pension decided to target a lower amount of 20 percent or 25 percent, it would have to build its portfolio slowly to avoid unnecessary concentration, Olofsson added.
The pension is waiting for further guidance from the government review on a revised return target, which would be around 7 to 8 percent in absolute terms.
“We need to get more clarity,” Olofsson said. “If you’re going to include real estate and infrastructure, you have to make up your mind. Can you achieve those returns, or do you have to tilt it much more towards private equity where you have higher risk but also higher returns?”
If given the green light from the government to increase its unlisted exposure, the first step will be to commission an asset and liability management study, Olofsson said.
Investors around the world appear hungry for alternatives. According to PEI‘s upcoming LP Perspectives 2021 study, the majority of investors surveyed plan to increase or maintain the amount of capital allocated to private asset classes over the next 12 months.
With more than 4 million members, AP7 is the default provider in Sweden’s premium pension system and its only defined contribution fund. Its total assets have grown almost 3,000 percent from around $2.5 billion 15 years ago.
Investing more in alternatives would be a logical step for the Stockholm-headquartered pension, Olofsson said.
“I think it makes a lot of sense for the savers, especially since we are so long term in our investments.”