By Hamlin Lovell, NordicInvestor

NordicInvestor interviewed Mikael Falck, Head of Alternatives at Kåpan Pensioner in Stockholm, Sweden, which manages approximately SEK 100 billion (EUR 9.6 billion) for 850,000 current or former Swedish government employees. The name Kåpan abbreviates “supplementary old age pension” in Swedish.

Kåpan sets an average long-term return target of STIBOR +6% across its whole alternatives allocation, but within this there is a range of targets for the different asset classes and strategies. “We have a barbell approach for infrastructure investing with at one end more leveraged private equity-style investments potentially expected to make double digit returns of 12-15% while return targets are lower at the other end of the spectrum, with more focus on yield as supposed to value appreciation”, says Falck. “These are not absolute return targets and are always subject to a fund/strategy case by case consideration, but higher risk infra investments in the “teens” with only a smaller yield component, vs lower risk core/core+ investments targeting only a modest value appreciation and yields of closer to 6-9%”.   

“Infrastructure fits into the real assets portfolio, which is dominated by mainly real estate, but also includes timber and farmland. Real assets are currently around 15% of total assets, of which infrastructure is about 2.3 percentage points”.

Falck is cautious on GDP sensitive assets, which currently only make up a smaller part of the real assets book. Equally, he has been positively surprised by the resilience of infrastructure holdings amid the Covid pandemic, and by their valuations. “There was only a small decline in first quarter valuations that rebounded nicely in the second quarter”, he points out.

Global Mega cap and Mid-Market

In infrastructure, Falck finds the mega cap space offers good opportunities for global managers to make strong returns, and also finds the upper end of the mid cap space appealing. In contrast he finds the smaller deals can be more challenging. Falck defines mid-market as fund sizes up to USD 1 billion while mega market funds could be as big as USD 13-14 billion.

Geographically, Kåpan favor Europe partly because it is closer to home, they know the market better and are able to generate interesting returns. Asia and emerging markets are also part of the latest commitments. (“We have also been biased towards Europe as there were historically tax disadvantages for non-US investors to invest in US real assets. These no longer apply”, says Falck).

Data and Decarbonization

One of the megatrends behind infrastructure is Data. Falck judges that, “fiber assets are not cheap, but we recognize that the strong growth story has been accelerated by Covid-19 encouraging more broadband usage as people spend more time working and staying at home. An emerging subsector of interest is ownership of data centres since the tech giants have an enormous need for storage capacity, and this segment also offers long leases and long contracts”.

Decarbonization is another megatrend guiding the allocations. “As a Nordic institution, ESG and sustainability are very important, and real infrastructure assets offer a very concrete way to demonstrate our active approach. Nordic countries are global leaders in ESG and sustainability issues, which are also politically driven. As managers of Swedish government employees’ money, there is naturally even more awareness of government objectives for sustainability”.

Renewable energy is clearly a green sector, but Kåpan is cautious on adding to the most obvious investments in renewables, which are starting to look overcrowded. “Some global solar companies that benefit from scale can generate adequate profits, but in some cases renewable projects, such as standalone wind farms, are having increasing difficulties meeting our return targets. Therefore, we are also looking at energy transition projects with higher returns, whereby utilities might move from coal to natural gas before going onto renewables”, says Falck.


More broadly, Falck finds it is easier to standardize ESG in liquid asset classes such as listed equity, but much more difficult to do so in illiquids, such as infrastructure. “There are not as many standardized measurement tools for the whole portfolio on the private side. In infrastructure we would rather show individual case studies of how we actively work with managers. While the GRESB framework is helpful in creating a global standard and in identifying ESG risks to some extent, we still feel the need to do a deep dive into individual managers’ ESG policies and investments, looking at what they have done in relation to specific assets”. In contrast, “UNPRI is now so common that it is almost a prerequisite to be a signatory of it, and this does not differentiate managers”.

Vehicles and fees

Falck generally likes to invest via closed end funds because, “they incentivize GPs to focus on exit time frames, monetize investments and maximize both IRR and multiples. This aligns managers’ interests with investors’ interests”.

Infrastructure however is one exception where, “open-ended structures can be a good fit for lower risk, core plus strategies, where the underlying asset level contracts are longer and hence a good match for an open-ended structure”, argues Falck.

He is a little bit frustrated to see fees rising and terms becoming less and less LP-friendly, but he is not surprised by this: “after a long bull cycle, it is natural for terms to keep shifting in favor of GPs. Managers with long and strong track records can charge higher fees and are doing so in a transparent way, raising headline fees”.

Collaboration and co-investments

Another challenge of being a relatively small institution is accessing lower fee brackets. Tiered fee structures are becoming more common and overall fees can decline with the size of investments, and Falck has noticed the minimum tickets for fee discounts are going up.

One way to tackle this problem is to club together with other institutions, aggregating assets to access the lower fee sleeves. “We have lately invested, alongside other Nordic institutions, through feeder vehicles and are in that way accessing lower fee sleeves, says Falck.

Kåpan would welcome more opportunities to save on fees via co-investments, but Falck admits that the pension fund is not large enough to have the resources to carry out timely due diligence on them. However, “new passive co-investment models involving a certain percentage of the fund commitment being allocated to co-investment opportunities does now offer a real chance to get more exposure to co-investments. Accessing managers’ due diligence capabilities is part of the attraction here. In this model we as an investor are totally passive, in other words the manager chooses the co-investments”.