PRI intends to grow private market allocations

By Jonas Wäingelin, NordicInvestor

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“We have mostly unfunded commitments in private equity and infrastructure as we speak, but the intention is for those two parts of the portfolio to grow and to become a more mature part of the overall alternatives allocation. We started allocating to these asset classes in late 2018 and early 2019 but today the alternatives portfolio is still around one third in hedge funds, one third in real estate and one third in private credit”, says Peter Ragnarsson, Head of Alternative Investments at PRI .

Founded in 1961, PRI act as a credit insurance company where the main task is to provide credit insurance and to administrate Swedish companies’ occupational pensions. The assets that Peter and his team runs are the premiums paid by the policyholders which includes major industrial companies such as Ericsson, Volvo and Telia.

“We are mutually owned by our policyholders and collect premiums of around 500 million SEK each year. In total we insure liabilities of approximately 300 billion SEK for 1200 industrial companies in Sweden. A common misconception is that we manage pension assets, but that is not the case, it is the insurance premiums paid by these companies that we manage”, Peter explains.

The asset management team at PRI only consists of three people, it is Peter running the alternatives book, the companies’ CIO and a portfolio manager focusing on Swedish equities.

“We are a very small team on the asset management side, currently three people. My mandate is everything that is not listed equities or bonds or long only ucits funds. It includes hedge funds, real estate, private credit, private equity and infrastructure. At year end, the allocation to the alternative’s portfolio was around 25 percent of the total portfolio, meaning around 7,5 billion SEK.”

Peter joined PRI in 2015 to build out the alternatives part of their portfolio, previously only consisting of real estate and hedge funds. He joined from AP3 where he had been part of the external management team. During his time at PRI, he has hence built the private markets portfolio from scratch, adding strategies over time.

The current portfolio consists of alternative investments ranging from daily traded UCITS hedge funds and hedge funds with monthly and quarterly liquidity to less liquid holdings on the private credit and real estate side. Apart from the alternatives book, the portfolio needs to be liquid in the case insurances needs to be paid out in the event of a default among the companies holding insurances with PRI.

“For us a liquid investment is an investment that can be liquidated in under a year”, Peter says. When sourcing for managers, Peter tends to do a lot of meetings including going to conferences, he says that 300-350 manager interactions per year is by no means an exaggeration.

“It might sound a lot, but I feel I need to do a large number of meetings in order to stay on my toes, keep track of the universe and to look out for potential candidates for the portfolio. Investing across different alternative asset classes also requires me to be broad in my coverage rather that to deep-dive in specific strategies.”

When it comes to decision making, Peter does the formal investment due diligence and usually visits managers on-site before doing the final investment. He writes an investment memo that is presented to the CIO and CEO for final approval. Alongside the investment due diligence, a legal due diligence is being done, currently together with a legal counsel and an external law firm. But since the beginning of this year they have added an external consultant for operational due diligence.

“The alternatives book has grown so much so we need a proper operational due diligence which is now done by Albourne, a well-known name in the industry”, Peter says.

Answering the question on how sustainability is incorporated in the overall investment process, Peter says that it is something that has become increasingly important as PRI wants to be a responsible investor but that it is easier in some asset classes than others.

“Hedge funds are a bit behind the curve compared to long-only equities. But today it is more and more common that hedge funds incorporate sustainability and ESG into their investment processes and we see that as a positive.”

“On the private market side, I wouldn’t say that not having a sustainability thinking is an absolute deal breaker, but we of course prefer the manager to have a sustainability focus. Within infrastructure we have done investments in renewable energy funds, one fund is focusing on energy storage for example and another one focusing on the whole energy transition phase.

Looking ahead, Peter says that there is a continued focus on growing the alternatives portfolio further.

“We have grown this portfolio from a 12 percent allocation to 25 percent as we stand but we want to bring that up to 30 percent over the next few years. Much of that increase is already committed to via private markets investments, private equity and infrastructure are the areas we are looking to grow. In private credit where we need to currency hedge our exposures, we will most likely focus on Europe since hedging costs are too high in the US given the large interest rate differentials.”