Alternative Investments – The PensionDanmark Way
March 26th 2015 |The Danish Securities Dealers Association| CEO Torben Möger Pedersen
PensionDanmark at a Glance
660,000 members

24,000 companies

Defined contribution plan
Agriculture and
Dairies
6%

No guaranteed minimum yields providing
investment flexibility
Cleaning
9%

Pension contributions (2014): EUR 1.7bn

Benefits (2014): EUR 0.7bn

Total assets:
2014: EUR 23bn
2018: EUR 30bn
Activities:
2
Member profile by industry:


Pension savings/insurances

Health care

Life-long-learning accounts
Manufacturing
2%
Hotels and
Restaurants
8%
Public sector
11%
Other
9%
Construction
35%
Transportation
20%
Balance, DKKbn
250
200
2014 =
EUR 23bn
Year end 2018
= EUR 30bn
150
100
50
0
07 08 09 10 11 12 13 14 15 16 17 18
Background: Sharp decline in interest rates
+ new business opportunities after the financial crisis
Yield levels for 10-year Danish
government bond since 1960
PensionDanmark’s
response to low interest
rates:
1 Increased focus on
alternatives with stable
cash flow
2 Increasing preference
for direct investment
3 Increased focus on
reducing costs
4 Responding to the
demand for private
sector funding of longterm investments
3
Target Asset Allocation
Life Cycle Product – Non-listed Assets (=Alternatives): 30 per cent
Per cent
100
Investment
Grade Fixed Income
Index
linked bonds
Investment Grade Fixed Income
80
60
Public and Private Equity
Public and Private Equity
40
20
0
Corporate debt, EMD, mezzanine and
Corporate debt
debt, EMD, mezzanine and distressed debt
distressed
Real
Real assets
assets with
with stable
stable cash
cash flows
flows
(Real
(Real estate,
estate, renewables,
renewables, infrastructure)
infrastructure)
-25
4
30
35
40
45
50
55
60
Age
65
70
75
80
85 +
Stable returns
Return before tax, per cent, age 40
18
Return 2014
17.0
Listed Investments
16
14
12.9
12
10.9
10
10.5
9.3
8.2
8
Listed Equities
12.2
HY / EM Bonds
4.1
Gov. and Mortgage Bonds
8.9
Non-listed Investments
6
Private Equity
20.3
4
Credit
12.1
2
Infrastructure
7.1
0
Real Estate
5.5
09
5
Per cent
10
11
12
13
14
PensionDanmark’s set up on alternatives
Organisation and set up
› We have a strong preference for direct investments
› Expected return and duration of our preferred assets is not well-suited for
most traditional real estate infrastructure and credit funds
› Direct control is important – including control over time horizon and exit
› But we are aware of the pitfalls
› You need significant internal resources and expertise
› Being able to asses risk is key – don’t invest in anything you don’t
understand
› You should be prepared to walk away from a transaction after many months
of hard work
› Importance of strong teams
› Real Estate
› Infrastructure
› Credit
6
Organization
Risk Management
Backoffice
Law
Danish Real
Estate
Alternative
investments
› PE Funds
› Direct
investments
Copenhagen
Infrastructure
Partners
Tax
Media
7 employees
7
7 employees
25 employees
Media
Media
Direct Infrastructure Investments
High level investment criteria
Overall Objective: Stable and non-cyclical cash flows
Investment characteristics
› Long term investment horizon
Geography
› Northern Europe and North America
› Preferred ticket size of EUR 50m-200m
Risk profile
› Low demand risk
› Low correlation to the business cycle
› Limited price risk (e.g. fixed power price)
› Limited regulatory and political risk
› Construction risk appetite dependent on asset and
structuring
Capital structure
› Flexibility to participate in all layers of the capital
structure
› No preference for leverage
› Experienced industrial partners – alignment of
interest
8
Potential asset classes
› Renewable energy (wind, solar, biomass, waste-toenergy)
› Distribution and transmission networks and
pipelines
› Regulated utilities and assets
› Transportation infrastructure
› Availability based infrastructure
› PPPs (Schools, hospitals)
Direct infrastructure investments
PensionDanmark’s internal team
2010
2011
2012
Nysted
Anholt
Texas/
Pennsylvania
› Offshore wind, DK
› Offshore wind, DK
› Onshore wind, US
› Size: 170MW
› Size: 400MW
› Stake: 50 per cent
› Stake: 30 per cent
› Size: 433MW
(3 parks)
› Operator and 50 per
cent partner: DONG
› Operator and 50 per
cent partner: DONG
› Investment:
EUR 100m
› Investment:
EUR 500m
9
2013
NGT
› Gas Transmission,
NL
› Size: 450 km
› Stake: 50 per cent
› Stake: 40 per cent
› Operator and 50 per
cent partner: E.ON
› Operator and 25 per
cent partner: GDFSuez
› Investment:
Undisclosed
› Investment:
EUR 164m
Direct infrastructure investments
Via Copenhagen Infrastructure Partners (CIP)
2013
UK Wind
Brigg - UK
› Onshore wind
› Biomass
power plant,
UK
› Biomass
power plant,
UK
› Size: 40MW
› Size: 44MW
› Stake: 85 per
cent in
preference
shares and
debt
› Stake: 85 per
cent in
preference
shares and
debt
› Size: 273MW
› Stake: 49 per
cent
› Operator and
51 per cent
partner: Falck
Renewables
› Investment:
EUR 190m
› Operator and
15 per cent
partner:
BWSC
› Investment:
EUR 160m
10
2014
Snetterton
› Operator and
15 per cent
partner:
BWSC
› Investment:
EUR 215m
2015
DolWin 3
Brite
Beatrice
› Offshore grid
connection
for North Sea
wind farms,
D
› Biomass
power plant,
UK
› Offshore
Wind Projekt,
UK
› Size: 39MW
› Size: Up to
664 MW
› Size: 900MW
› Stake: 49 per
cent
› Partner and
operator:
TenneT
› Investment:
EUR 400m
› Stake: 100
per cent CI II
owned
› Operator:
B&W Volund
› Investment:
GBP 160m
› Stake: 12,5
per cent CI I
owned, 12,5
per cent CI II
owned
› Operator and
partner: SSE
and Repsol
› Investment:
EUR 400m
Direct Credit Investments
High level investment criteria
Direct Credit Investments
› PensionDanmark has a significant investment capacity within the senior secured credit area and in junior and
mezzanine loan tranches
› PensionDanmark does not have any rating requirements, but in general targets credits that have a BBB equivalent
credit quality or better
Overall Objective: To harvest a premium for illiquidity and flexibility
in structuring
Senior secured investment criteria
Junior/Mezzanine investment criteria
› Long investment horizon (7-25 years)
› Medium investment horizon (5-10 years)
› Desired ticket size of EUR 20-60m
› Desired ticket size of EUR 20-60m
› Primary focus on Northern Europe and North
America
› Nordic focused companies or projects
› Preference for floating rate
› Stable business models with a proven track record
of handling business cycles risks
› Examples:
› Prudent capital structure and reasonable loan terms
11
•
ECA guaranteed loans (EKF, Euler Hermes, Atradius)
•
Infrastructure and renewable energy credits
•
Danish corporate credits
•
Nordic related leverage loan credits
› Sponsored by top tier PE fund or best in class
corporate
Direct Credit Investments
Track record – executed by PensionDanmark´s internal team
2011
2012
2013
2014
EKF
JP Morgan
Scandlines
Kompan
NOP Agrowind
› Investment:
EUR 200m
› Investment:
USD 375m+
› Investment:
EUR 30m
› Investment:
DKK 420m
› Investment:
Undisclosed
› Product:
Three ECA
guaranteed
loans with
Eksport Kredit
Fonden (EKF)
› Product:
Secondary PFI
and infrastructure loans
bought in
cooperation
with JP Morgan
Asset
Management
› Product:
Senior secured
loan to the
refinancing of
Scandlines (ferry
operator)
› Product:
Mezzanine
capital in LBO
transaction of
Kompan
(playground
equipment
manufacturer)
› Product:
Senior secured
project finance
debt to onshore
wind farm
› Geography:
Northern Europe
› Geography:
Primarily UK and
Benelux
12
› Geography:
Denmark
› Geography:
Denmark
› Geography:
The Netherlands
PD’s real estate strategy
8 per cent of total asset invested in the domestic market. Target: 10 per cent
› Team of 7 investment professionals
PriceWaterhouse
Coopers A/S
› Background in engineering and construction
› 80 per cent in core commercial real estate
› Long term leases (current average > 10Y)
› High quality tenants (More than 40 per cent is
rented to the Danish State)
› Vacancies under 5 per cent (also during the
financial crises)
UN City, Marmormolen
› 20 per cent in domestic housing
› Opportunistic strategy
› Focus on acquiring attractive land, where we can
build 15-20 per cent under current market prices
› Flats are either sold with a profit right away or
rented
13
Islands Brygge
Examples – Real Estate
UN City, Marmormolen
45.000 m2
Magasin x 4
In total 134.000 m2
14
Nordea, Ørestaden
46.000 m2
Psychiatric hospital PPP
17.000 m2
Semco, Esbjerg
15.000 m2
Islands Brygge
55.000 m2
Conclusions and observations
› It is possible to harvest attractive illiquidity and competence
premiums and construct cash flows with attractive sharp ratios
and low correlation with equities/business cycle
› Potential issues and observations with direct investments
› It requires
› Significant internal resources and expertise
› Models with market based compensation to attract top investment talent
› Senior level buy-in
› Good advisors has also been key in PensionDanmark’s transactions
› Hard to avoid some concentration risk in the portfolio
› Significant reputational risk if things go wrong
› A challenge if your board is unable to understand and asses risk in these
kind of investments
› Key to be agile and willing to change focus if assets get overpriced
› Ability to source proprietary deals will become even more essential
15
pension.dk
CEO Torben Möger Pedersen | [email protected]