By Hamlin Lovell, NordicInvestor

Afa Försäkring (Insurance) with assets of approximately SEK 200 billion (EUR 20 billion) is open to expanding its exposure to illiquid alternatives: private equity, private debt and most recently infrastructure. NordicInvestor interviewed Head of Alternative Investments, Mikael Huldt, about how the program is developing and how the ESG criteria are evolving.

“This is a very strange macro environment. There is huge stimulus from fiscal and monetary policy, and everything is on steroids, with valuations stretched, in public and private markets. Massive inflows of capital into private markets in general are creating bubbles pretty much everywhere. There is a lot of dry powder in private equity, and institutions want to allocate to infrastructure despite there being not that many deals around. The private debt opportunity set is larger and does not have the same supply/demand imbalance dynamics,” says Huldt. For example, private equity assets are around USD 3.9 trillion but private debt assets are only around USD 800 billion, according to Preqin.

Notwithstanding high valuations, if the right opportunities present themselves AFA is open to expanding its illiquid alternatives allocation somewhat from today’s ~12%, particularly in infrastructure, which AFA only started allocating to in 2019. “The infrastructure allocation is seeking to get a well-diversified exposure by geography and sector, and focuses on areas that have a demonstrable resilience in surviving crises as well as the pandemic,” says Huldt.

The allocations are continuing according to schedule partly because Huldt is not confident about market timing: ”we try to invest as evenly as we can so we are not timing anything in particular. We find it is impossible to time the allocations and therefore we diversify by vintages. Additionally, each vintage will be deploying its capital over a number of years, which cannot be perfectly predicted. We might allocate in one year and see the capital deployed during a recession several years later,” he explains.

Return targets and manager sizes

Therefore, return targets are viewed as averages through a cycle. For instance, the private equity return target of mid-teens is averaged over longer time periods typically >5 years. In private debt, the long-term target is much lower: a relatively conservative 6-7%. “In private debt, we favour managers with long term track records who have survived through crises, and who have the bandwidth and resources to deal with issues,” says Huldt.

The size of managers allocated to also differs between private debt and private equity. “We tend to find that larger managers can access more interesting deal-flow in private debt. In contrast, for private equity, we find that the small to mid-market is generally more attractive, because the smaller deals in many cases are harder to access while the larger ones tend to be more competitive and typically more correlated with public markets,” says Huldt. AFA has been invested in private equity for 20 years, focused mainly on more mature companies through buyouts and growth strategies, and mainly in Europe and North America. Venture capital is not invested in, partly because AFA’s typical ticket size – combined with the constraint that it does not want to be a too large investor in any individual fund – would be too large for many venture funds.


The philosophy behind the allocations also differs between private equity and debt. “We do not apply leverage to private loans, and do not coinvest in individual deals. We approach private debt from a credit perspective, trying to achieve high diversification. So doubling down on a single credit does not make sense,” says Huldt.In private equity, we do take a view on the timing of co-investments for more proactive individual company bets focused on specific sectors and geographies. Here we are trying to generate alpha and rifle shooting the more attractive opportunities,” explains Huldt.

ESG and KPIs (Key Performance Indicators)

ESG performance monitoring applies to alternatives and traditional assets at AFA. “We recently signed up to the UNPRI and are mindful of ESG across all asset classes. Portfolio managers do due diligence and present their findings, including ESG, to the board and investment committee, who decide if managers’ ESG policies are acceptable or not,” says Huldt.

“Hard exclusions to tobacco, weapons and pornography apply across all asset classes. Additionally, we have since several years ago ceased investing in strategies dedicated to the extraction of conventional oil or gas. On top of these general exclusions, AFA investigates individual investments to form a view whether they are sound from an ESG perspective,” he points out.

There is also a dialogue with managers to improve their ESG policies and reporting: “engagement with managers is an important part of our portfolio management and occurs on two main levels: how managers exercise governance rights, and how they employ their own ESG standards, such as which ESG KPIs they are measuring and which targets they are setting for themselves. There are no set standards for private markets, but ILPA (Institutional Limited Partners Association) standardized reporting provides some guidelines for reporting according to best practices. If we do not get enough disclosure, we have an ongoing dialogue with managers to improve reporting. That said, many managers are UNPRI signatories, and most provide dedicated ESG reporting on an annual basis,” says Huldt.

Yet some aspects of reporting cannot be easily standardized. For instance, “KPIs, which could cover carbon footprint emissions or health and safety, need to be tailored to companies and sectors. For a technology software company, carbon footprint may not be the key KPI to consider and workplace diversity might be a much more interesting data point,” explains Huldt.

“Impact investing” is becoming a fashionable way to describe investment strategies, but those with a positive impact are not necessarily branded or labelled as such. “There is no dedicated impact investing approach as such, but impact and the ability to implement ESG and sustainability in the value creation work is very much being considered in our choice of managers. We are considering how to improve companies in respect of ESG and sustainability as a means to generate attractive returns,” says Huldt. Indeed, recent research suggests that public companies with higher ESG scores have seen an expansion in valuation multiples.

EU Sustainable Finance and Solvency II

“We have for some time paid a lot of attention to ESG integration as well as the EU Sustainable Finance initiatives including the taxonomy, and this is ongoing work where you always need to steadily improve” says Huldt. The EU taxonomy of environmentally sustainable activities is certainly controversial in that some investors view it as being rather narrowly defined, but it will become important for product labelling.

Right now, Solvency II rules have limited impact on the overall illiquid alternatives programme, partly because AFA is fortunate in being in a strong solvency position: “we are very well capitalized so do not need to optimize strategies within the Solvency II framework. We are however obviously very mindful of those parameters, such as the solvency II regime being favourable to private unrated loans. We do not apply leverage to the loans, which would increase the Solvency II weighting, however,” says Huldt.

Sourcing new managers

Huldt has adapted to remote working partly because he can rely on a long history of networking in the industry. “It is a tricky time to invest when we cannot sit down face to face with managers and see them eye to eye. But it has been manageable so far. We do a lot of videoconferencing, and historically have had an open-door policy of taking meetings even though we do not invest with all managers. We therefore have a big network and database to lean on in times like these. A positive development coming out from the pandemic is that managers’ reporting has improved as they need to rethink how they communicate and stay in touch with investors,” says Huldt.


Huldt is probably somewhat more cautious than the current market consensus, but is staying on track with the allocations. “This is a very unusual time with huge capital flows, central bank and fiscal stimulus creating record competition for assets. But we are still living through a pandemic and are not out of the woods yet, so times are very uncertain. We have not yet seen a widespread impact on financial assets because of stimulus from fiscal and monetary policy and the fact that some companies are getting artificially breathing through government support or furlough schemes. We are not timing the markets but continuing our long term strategies to capitalize on interesting private markets opportunities,” says Huldt.