By Hamlin Lovell, NordicInvestor

The c.DKK 566 billion (c.EUR 75 billion) Danica pension fund has allocated around EUR 4 billion, or some 35% of its alternatives sleeve, to private equity. Over half of the allocation is to buyout funds, with allocations also to secondaries and fund of funds, and a small allocation to venture capital. Some 60% of the portfolio is weighted to Europe, with a high allocation to the Nordics within this. There is also a weighting to the US, with a small allocation to emerging markets and Eastern Europe.

“The return target for buyout funds is 15-20% gross, or 10-15% net, in terms of internal rate of return (IRR). Over the past five years Danica’s portfolio has produced strong returns within private equity, averaging around 16% IRR over the last five years, in Danish Kroner. Currency risk is not hedged. Since Danica regularly receive distributions from private equity funds, there is cash readily available to recycle into new funds. Currently, we are looking to deploy around DKK 4-5 billion over 2019 and 2020. We see a lot of potential for high expected returns and so consider private equity as a key focus sector within alternatives. We invest across a broad range of sectors, including financial services, business services, health, consumer, retail, and engineering, but do not generally go for sector-specific funds. That said, we have some technology exposure that has produced strong returns over the past ten years”, says McPhater.

Due diligence and manager selection

In common with most pension funds in Denmark and Sweden, Danica does not use investment consultants, and has a strong network of contacts in the private equity industry.

“The whole due diligence process is done in house. We draft an investment memorandum, which is around a 60-page document presented to the investment committee.  Each part is handled by specialised teams, including tax and legal teams, who seek to negotiate more favourable terms. We have not had any pushback from investing into a fund due to tax or legal reasons. We could also leverage upon the expertise of corporate finance, debt or equity teams within the parent company, Danske Bank, if we require it. The due diligence typically takes between three weeks and three months, depending partly on whether we already have a relationship with the manager and know them well, or whether it is a new relationship for us”, she continues.

Danica invests through comingled vehicles, and has no particular preference on domiciles, though the most common two have been Cayman and Luxembourg.

“Management fees are generally 1.5%, as offered by the large cap and mega buyout funds. However more managers offer discounts, for early subscriptions or size. The carry is usually 20%, which remains the prevailing rate in the majority of the funds. The hurdle rate is nearly always 8%, but some GPS have been reducing this, or even removing it, which is not a model we like”, she adds.

Danica view co-investment opportunities as a key area to their strategy. Co-investment opportunities involve extra due diligence, alongside the manager, on the underlying companies being invested in. For co-investments, Danica will end up having two exposures to an investee company: an indirect one via the comingled private equity fund, and a direct one through the co-investment. “This is a great way to access good companies that we know well through the main fund anyway. Danica typically invests EUR 50 million in a co-investment deal”, she says.

Danica has not done any secondary market private equity deals, but could contemplate selling some positions through the secondary market if preferential prices could be obtained. The firm does not invest in exchange-listed private equity funds (though McPhater has some experience of them from her time at Aberdeen Standard in London, where there was a listed private equity fund of funds).

Thus, McPhater has a considerable amount of freedom to search for funds within the private equity universe, and this applies to alternatives at Danica right across the board – subject to demonstrating appropriate due diligence and monitoring.

“Danish pension funds have freedom to invest across the spectrum in alternatives, but the regulator is increasingly enforcing the prudent person principle and demanding evidence of due diligence and ongoing monitoring. We have just been audited by the regulator, and had to show that we documentation for all investments. For instance, a spreadsheet watchlist of risk factors lets us check if the risks monitored now are those identified when we originally invested. We need to review this quarterly. We meet all managers at least annually and local ones quarterly”, she explains.


Danica runs an ESG public equity fund and ESG also forms an important part of the private equity due diligence process. “We are incorporating ESG analysis into our commercial due diligence. We also have a dedicated ESG team who undertake their own analysis. Our ESG policy exclusion list (which is published on the website) can be incorporated into our side letters. Excluded sectors include weapons and thermal coal. The ESG team has not vetoed any private equity investments”, she points out.

This year Danica announced that companies doing new deals to export weapons to Saudi Arabia would be added to its “blacklist”, following the Danish Government’s decision to suspend approval for such exports, in response to the murder of journalist Jamal Khashoggi.

Danica is signed up to ESG-related commitments including:

• UN Global Compact

• OECD Guidelines for Multinational Enterprise

• UN-supported Principles for Responsible Investments

• UN Environment Program Finance Initiative

• Institutional Investor Group on Climate Change

• CDP (formerly the Carbon Disclosure Project)

• UN Framework Convention on Climate Change

• The Montreal Protocol on Substances that Deplete the Ozone Layer

Working in Denmark

Scotswoman McPhater has been living in Denmark for over four years. Though she has learned the language, the majority of the  reports and presentations are in English, which is the company language. The working culture in Denmark is very different from London. “London is very much about desk time and being present in the office, while Denmark is more about work-life balance. We do work extremely hard, but in a more condensed way, with shorter lunch breaks. Meetings tend to start and end on time, with a conclusion drawn and follow up points and there is a more direct approach with less ‘faffing around.’ That seems to be the Scandinavian way in general. There is also more flexibility so we can leave earlier if we need to, all part of the higher work life balance. Less micromanaging ensures employees are given the freedom to deliver the results”.

Though taxes and the cost of living are high in Denmark, childcare costs are markedly lower than in London, and maternity leave provisions – for both parents – are also more generous, she has found.

Women in Finance

Female politicians and non-executive company directors convey an impression of gender balance in the Nordic countries, though women remain very under-represented in executive management roles and in finance.

McPhater is the only woman in Danica’s alternatives team and there are only two among 50 people in Danica’s investment team. “There are even less women than in London. It is like taking a step back to how London was 10 years ago. We do not have any formal quotas, but the long-term goal is to add more women to the team We would like to hire more women but do not receive sufficient applications. It is a big push to get women into investment roles within Nordic Private Equity, which is still viewed as a man’s job here”, she explains. McPhater has set an example that could well be followed by women from the Nordics – or from other countries.