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]
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