By Jonas Wäingelin, NordicInvestor
Mikael Falck joined Swedish Kåpan Pensioner in 2015 after having spent 12 years at Nordea Investment Management where he was responsible for alternative investments and manager selection.
Kåpan manages SEK 92 billion in collectively agreed occupational pensions for people who are or have been government employees.
At Kåpan, Mikael heads a team of two who manage around SEK 15 billion of the firm’s assets in the alternative investments bucket.
“Slightly simplified, Kåpan divides its investment teams into equities, fixed income and alternatives. In the alternatives bucket my team does private equity, real estate, infrastructure and timber investments. Also, on a more opportunistic basis, we do agricultural investments.” explains Falck.
There are no real technical barriers in our allocation models to prevent us from investing in hedge funds but I see it as very unlikely that we would.
He continuous “We don´t allocate to hedge funds anymore although we still have some exposure from earlier investments. After the financial crisis of 2008, we made the strategic decision to focus on the illiquid side of the alternative space thereby discarding new hedge fund investments. There are no technical barriers preventing us from investing but I see it as very unlikely that we would.”
The alternatives book as a share of total assets stands at about 16.4 % and is broadly broken down in two main parts; private equity and real assets. “Our private equity holdings are part of a broader equity allocation and account for around 2,5 % of total assets. The rest of the alternative investments accounts for approximately 14 % of assets.”
In 2017, Kåpan managed to deliver a total return on invested capital of 7.1 %. The return targets for the alternatives book is currently slightly lower.
“For real assets we have a target of 6 % above 3-month stibor which is seen more as a guiding target than an absolute return target. Within the asset class there are many different strategies and risk levels so the return targets differ for each subportfolio. But the overall return target for the entire real assets portfolio remains the same.” explains Mikael further.
As most others, Kåpan has a mix of in-house and external managers. Equities are divided in two teams; Swedish equities which is managed in-house and global equities were external managers are used. The fixed income side is also esplit with Nordic bonds being managed internally while alternative fixed income is managed by external managers where Kåpan tends to take a more opportunistic approach.
In terms of investment sourcing and manager selection for the alternatives portfolio, Falck and his team rarely uses consultants but rather use an extensive network of connections as well as databases and regularly meeting with managers.
It was just too time consuming to do deal sourcing and even getting allocations in the best funds was hard
“I brought with me over 15 years of investment experience and rely on a network of managers that we meet with and don’t see the need for consultants. The only time we made an exception was when we were looking at private equity investments into the US mid-cap space. It was just too time consuming to do deal sourcing and even getting allocations in the best funds was hard. So, in that particular space we gave a mandate to an external consultant” explains Mikael
The team will initiate a search when they either want to allocate to a new asset class, but more likely when increasing exposure to asset classes where they are already invested.
“When we identify an asset we want exposure to, we start the manager selection process by initiating a specific search for the best managers in that field. In practice though, this is a continuous process where I like to meet managers and hear about specific strategies or products. In other words, we never start from scratch and unlikely that a new manager search is within a field we are unfamiliar with or would not have an opinion on.”
The first step with a potential manager is a phone call where wider due diligence is done by discussing strategy, organisation, investment philosophy and track record. From there the team usually ends up with a short list of 3-4 managers where the next step is on-site visits to see the managers in their natural habitat. We use external legal counseling who help us go through legal structures, documentation etc.
Prior to engaging in legal due diligence, the investment needs to be approved by Kåpan’s Alternative Investment committee, consisting of CEO, CIO and the alternative investment team.
Kåpan has a big focus on ESG and also produces a sustainability report each year. So how does the team manage sustainability criteria in the alternatives space?
“For us there is a difference to, let´s say, the equities team, in that they most often invest in companies directly and we try to choose best of breed, high conviction managers who in their turn make the final investment decisions.” says Falck.
It is not as standardised as on the equities side and we don’t have a list of formal demands just to tick off boxes
“ESG and sustainability is a very important factor in our due diligence so when we sit down with a manager and drill down into what is important – ESG is right there. We need to understand how they work with it, what their policy is and most important how it is implemented in the investment process and the ongoing management of portfolio investments.”
“It is not as standardized as on the equities side and we don’t have a list of formal demands just to tick off boxes“, Falck continues. “The key for us is to understand their process and policy and if they can´t deliver we do not invest. In the end we are one step remote compared to equities but we can have strong opinions on investments that are deemed unsustainable, immoral etc. and we use opt-out clauses. But so far we have not invested with any managers where this has been an issue.”
The topic of sustainability and ESG also shows to be a perfect segue into the areas where the team is currently looking at and where they see the most progress from managers.
The infrastructure space is one where Mikael currently sees an interesting opportunityset. Not least in the renewables space niche and the chance to make direct impact through investments.
Infrastructure is also the asset class that the team is trying to actively grow. “From the perspective of an institutional investor the asset class has really matured” says Falck. “The risk-adjusted returns look good and counterparty risk is often mitigated through, sometimes even sovereigns”. Says Mikael and explains that this is also a reason they have stayed away from the debt side of infrastructure investing, there simply has not been a need.
The team prefers investing through fund structures as they provide built-in diversification. While Kåpan have in some occasions participated in club deals or managed accounts, Mikael still prefers close-end limited partnership fund structures, which cater for good alignment of interest between the manager and investors. “It is easier to track a fund-by-fund performance of closed-end structures, which puts positive pressure on the manager to deliver good returns for an existing fund before being able to raise capital for a successor funds”, Falck comments.
As the alternatives team need not worry about liquidity they tend to stay away from listed investments, as they bring in unnecessary volatility into the alternatives portfolio.