Swedish buffer fund AP1 to focus on reducing risk in equity portfolio

February 20, 2012

SWEDEN – AP1, one of Sweden's national buffer funds, is "working hard" to reduce volatility in its equity portfolio following a year of turbulent markets and continual economic uncertainty.

According to its annual report, its equity portfolio fell by 9.8% in 2011, while the total SEK213.3bn (€24bn) portfolio fell by 1.7% before costs and 1.9% after costs for the full year.

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Johan Magnusson, who holds the dual roles of chief executive and CIO, said AP1 had reviewed the equity strategy last autumn to create a more robust portfolio.

This led to a more strategic focus and active asset allocation, and a shift away from passive management.

Historically, the fund has invested more than half of total assets in equities. Because equity prices tend to be more volatile than those of other asset classes, equities account for the lion's share of the fund's total risk.

Over the last 12 months, AP1's equity allocation has been cut from more than 60% to just under 50% in favour of fixed income and alternatives.

Magnusson said the buffer fund would introduce risk-reducing strategies in the equity portfolio. As a result, the geographical remit for AP1's in-house asset management – which currently manages only Swedish and European equities – is likely to be broadened.

The fund will therefore continue to increase the amount of assets managed in-house, which currently stands at 58.6%.

During the year, the management of credit bonds was also brought in-house to integrate credit bonds into the rest of the fixed income management and increase flexibility. Fixed income returned 7.1% for the year.

At the end of 2011, the fund was invested 49.2% in equities, 40.9% in fixed income and 9.3% in alternatives, while it had a currency exposure of 21.3%.

The strategic allocation is 50% in equities, 30% in fixed income and 20% in alternatives.

Another change implemented by AP1 during 2011 was to boost its allocation to alternatives, which returned 10% for the full year.

Real estate investments were increased in particular, and the fund said it aimed to continue adding to investments in the asset class in the coming years.

Last year, AP1 created real estate company Cityhold together with AP2 to invest in office space in large European cities.

Magnusson said alternatives served as a "good complement" within the portfolio and that he expected them to produce a more stable return over time, increasing the portfolio's robustness.

He conceded they also entailed higher costs, but he argued that returns after costs were what mattered most.

Urban Karlström, chairman at AP1, said alternatives had grown in importance as various asset classes became increasingly correlated, but he lamented the fact that the buffer funds' current investment rules for the asset class were "inefficient".

Author: Pirkko Juntunen

Capital requirements 'disastrous' for pensions growth, commission warned

February 13, 2012

UK – Increased capital requirement measures under a revised IORP directive could lead to the closure of all remaining UK defined benefit schemes and pushbusinesses into insolvency, a letter from UK employee and employer representatives to the European Commission has warned.

In a letter sent to Commission president José Manuel Barroso today, the National Association of Pension Funds (NAPF), alongside the Confederation of British Industry (CBI) and the union umbrella organisation TUC, said that the revised directive on occupational pensions would "undermine" the retirement prospects of millions of Europeans and have a "disastrous impact" on the long‐term growth and employment in the single market.

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According to the three organisations, companies sponsoring occupational pensions would see the cost of such funds increase significantly due to the capital requirements imposed.

"This would force them to divert money away from investment in growth, job creation and research and development", the letter said.

In addition, the NAPF, CBI and TUC argued that pension schemes would need to review their investment strategy in order to comply with the new regulations.

Like many pension associations and asset managers, the three organisations believe that investment strategies would shift away from return‐seeking assets – such as equities – into risk‐free high‐quality bonds and gilts, if liabilities were to be calculated using a risk‐free discount rate.

"Less equity investment would restrict capital flows to businesses, at a time when they are being asked to put even more cash into schemes", the letter continued. "With European pension funds holding over €3trn in assets, a major switch in asset allocation would have an immediate catastrophic impact on the stability of European financial markets."

Katja Hall, the CBI's chief policy director and one of the letter's signatories, previously warned that Solvency II regulations would cause a "massive" flight from equities, with funds forced to focus on fixed income over investment in the stock market.

She said at the time that "large and unpredictable liabilities" were harimg a company's ability to both attract investment and grow as a business.

"What's completely unacceptable is Brussels' plan to impose further costs on firms operating defined benefit pensions at a time like this, when the protection in place has already proven itself during the economic crisis," she said last year.

Joanne Segars, chief executive of the NAPF, today insisted that Solvency II type rules would put extra pressure on companies struggling for survival, and also force them to divert money away from investment and new jobs.

"Faced with extra funding demands, many businesses will simply shut their final salary pension down", Segars said.

The letter was sent as the Commission is set to receive draft advice on the IORP directive from the European Insurance and Occupational Pensions Authority (EIOPA) this week.

In its draft proposal, the EIOPA highlighted the need to conduct a quantitative impact studies (QIS) on the holistic balance sheet approach (HBS) proposals, which aim to replace Solvency II capital requirements proposed by the Commission.

The NAPF, the CBI and TUC however criticised the lack of action taken by the Commission in their letter to Barroso.

They expressed concerns over the fact that the Commission has not yet carried out a comprehensive and detailed quantitative impact assessment on its proposals.

"While we welcome EIOPA's commitment to carry out its own quantitative

impact study, a comprehensive macro‐economic impact assessment must be carried out by the Commission before any decision is made on whether to go ahead with a new draft Directive", they argued.

The HBS approach has been widely criticised in the UK and elsewhere in Europe.

In its response to the Call for Advice on the revised IORP directive early this year, the EIOPA Occupational Pensions Stakeholder Group (OPSG) agreed that a holistic framework "might be helpful" but said that the components needs quite some judgement and is likely to be "subjective and approximate".

The European Federation for Retirement Provision (EFRP), which also welcomed the idea of taking into account all the risk instruments an IORP can have, echoed those concerns, warning that the HBS was too complex to serve as a primary tool of supervision.

Author: Cécile Sourbes

SEC Launches Inquiry Aimed at Private Equity

February 11, 2012

“That is why we created a merchant bank that has transparent returns secured against visible assets.”

By GREGORY ZUCKERMAN

Federal regulators have launched a wide-ranging inquiry into the private-equity industry that examines how firms value their investments, among other matters.

The Securities and Exchange Commission's enforcement division sent letters to private-equity firms of various sizes in early December as part of an "informal inquiry," according to the letter and people familiar with the matter.

It is unclear which firms received a letter, which includes language saying it shouldn't be construed as an indication the agency suspects securities-law violations.

The inquiry suggests regulators are ratcheting up the attention they pay to the $1.2 trillion industry, which typically hasn't been a major focus of the SEC. Private-equity firms generally use debt to buy companies and then spend time improving operations before trying to sell them at a profit. These firms, which usually don't trade stocks or bonds, weren't at the heart of the housing collapse, nor have they figured in recent high-profile trading scandals.

After the financial crisis, and as the private-equity industry has grown, the SEC has moved more resources to policing the area. The SEC now has "an inventory" of cases involving private-equity firms that it may bring, according to one of the people familiar with the matter.

SEC officials have told industry participants that the regulator is looking at how performance data is presented, said Michael Harrell, an attorney at Debevoise & Plimpton LLP. He said one concern could be presentation of misleading values when a firm is marketing.

Valuation issues have long been a subject of some debate around the industry because the companies that the firms own usually aren't listed on a stock market. There have been some instances when two separate private-equity investors in one company have assigned it different values; firms have said they use different methodologies and valuing a private company can be more art than science. Some firms, such as KKR & Co., use outside firms and auditors to review their valuations.

The SEC's letter requested information related to 12 broad areas, including fund raising and fund formation. It asks the firms for "support for valuations of the fund assets," and "documents setting forth a value for any assets owned by the fund" over the past three years. The regulator also asked for details on "all agreements" between the private-equity funds and others valuing a fund's assets.

The inquiry comes amid recent comments from SEC officials that the industry is drawing greater scrutiny.

"I think that private-equity law enforcement today is where hedge-fund law enforcement was five or six years ago," Robert Kaplan, co-chief of the SEC's asset-management unit, told the Dow Jones Private Equity Analyst Outlook conference in New York late last month.

The agency is looking at "higher-risk" activities, such as potential conflicts of interest, he said and pointed to concerns about fees and other issues.

At the same conference, Chad Earnst, assistant director of the SEC's asset-management unit, said valuations that private-equity firms place on companies they own are drawing greater SEC scrutiny. "We'll focus on whether there's a systematic and consistent way the valuations are applied," he said.

Some investors say valuations of companies owned by private-equity firms can have less importance than valuations of investments held by hedge funds and others. While both types of firms often take 20% of any investment gains for themselves, hedge funds typically claim this fee at the end of a profitable year. Private-equity firms, by contrast, receive their 20% cut only after they have sold a company for a profit and the private-equity fund achieves a certain level of gains, so an interim value is less important.

"There's often room for differences of opinion, and some firms are purposely conservative, while others want to make themselves look better," says Steven Kaplan, a professor at the University of Chicago Booth School of Business, and no relation to Robert Kaplan. "I'm not sure how much it matters, though, because [private-equity] firms only get paid when they return money" to investors after selling a company.

Realities of a Mature Market

Changes in Private Equity and why an Alternate Asset class Fund that is transparent and secure will be interesting!

February 6, 2012

Private equity general partners about to hit the fundraising trail will encounter an investment community with a very different appetite for private equity than was the case during the previous fundraising effort. As the panel of experts assembled for Privcap’s new series on fundraising attest, limited partners today have matured and adapted, and GPs who fail to recognize this may go home empty handed.

“Realities of a Mature Market” is the first of three programs in Privcap’s “Changing LP Appetites” series. This illuminating discussion includes Peter von Lehe, managing director with Neuberger Berman, Hussein Khalifa, a partner with MVision, and Michael Elio, a Managing Director with LP Capital Advisors. The second segment in this series is called "Culling the GPs." The third program is called "In Search of Growth."

Topics discussed in this program include the signs of sophistication among LPs, the critical importance of understanding illiquidity, new best practices in portfolio construction and investment pacing, fee terms that are here to stay, and the continuing education of board-level private equity program overseers.

This series is sponsored by MVision.

Registered users of Privcap may access this 24-minute, chaptered video program, a full transcript, audio-only version, as well as Privcap’s entire archive of thought-leadership content. Register here – it’s free and quick.

About "The Fundraising Market"

Capital commitments are the lifeblood of the private equity industry, and in today’s market, even the most seasoned private equity firms feel anxious about their next fundraising effort. Institutional limited partners have new appetites, new policies, higher standards and more rigorous due diligence requirements. Market participants that fail to understand and plan around these trends risk not merely a weak follow-on fund, but the end of their franchise. The Privcap series, “The Fundraising Market,” delivers vital intelligence on fundraising and investor relations from seasoned experts, helping all market participants better navigate a changed capital landscape.

Dutch Pension Scheme ABP to cut participants' benefits by 0.5%

February 2, 2012  NETHERLANDS – The €246bn Dutch civil servants and teachers scheme, ABP, has announced that it intends to cut participants' pension benefits by 0.5%.  The cuts will apply to both active participants and retirees.

The scheme also announced that the temporary contribution increase it put in place previously would be increased from 1% to 3%.  The new measures have been included in the recovery-plan evaluation the scheme is to submit to the pensions supervisor (DNB) and are subject to regulatory approval.  The measures are dictated by the fact that ABP's funding ratio, which stood at 94% at the end of last December, is now too low to feasibly recover to the required level of 105% by the end of 2013.  The scheme said this was mainly due to the low interest rates the scheme must apply as the mandatory discount rate.  "For this reason, ABP will once again make its arguments to the DNB as to why the scheme favours a discount rate based on a one-year average interest rate," it said.

Unless ABP's financial situation improves drastically, the benefit cuts will take effect from April 2013.  Premium contributions will increase from 1 April, but will be adjusted to raise the intended extra contribution for 2012 and 2013 in the remaining 21 months.  Of these pension contributions, employers will pay 70%, while employees raise the remaining 30%.  Both the employer and plan participant councils have agreed to the measures, although both councils have called them "painful". 

According to ABP, a "sizeable minority" of the participant council was, in fact, opposed to the decision.  Trustee board chairman Henk Brouwer said he could "very well understand" the disappointment of ABP employers and participants.   But with these measures, at least, "the contribution that workers, retirees and employers are asked to make to the recovery of the fund, is distributed fairly".  He added: "The cuts will hit working plan participants in the accrual of pension rights, while retirees are hit in their retirement benefit payments."

Author: Mariska van der Westen