Asset Class – November 2007

Katja Salovaara explains why the market lull will not divert Finnish pension Ilmarinen from increasing its commitment to private equity. By Andy Thomson.

Crossing a bridge that transports you into Helsinki’s financial district you can’t miss the distinctive deep blue building with the name Ilmarinen perched on top, marking the headquarters of the second-largest pensions company in Finland (full name Ilmarinen Mutual Pension Insurance Company). You may not, however, identify the rather obscure entrance to the building quite so easily and – once inside – it would be easy to get lost in the sprawling, homogenous interior.

Fortunately, during a recent visit to the Finnish capital, I was met at reception and adeptly guided through the winding corridors inside by Katja Salovaara, who joined Ilmarinen in 2000 as a portfolio manager responsible for analysing and making investments in private equity funds. Via a quick viewing of Ilmarinen’s cavernous staff canteen – strangely lacking customers even at midday – we arrive at a meeting room where Salovaara explains why she is bullish about private equity in the face of more challenging market conditions.

“There are no large deals happening at the moment, but that doesn’t change our view of private equity’s prospects in the long run. It’s a short-term slowdown and the repricing of risk that we’re seeing may actually turn out to be a good thing,” she says.

You can’t simply translate fast GDP growth into higher private equity returns

Katja Salovaara

Salovaara has every reason to remain optimistic despite what she admits will be a “negative impact” on the portfolio stemming from the credit crunch. She reveals that, in 2005, 50 percent of the value of Ilmarinen’s private equity portfolio at the beginning of that year had been returned in the form of distributions by the year’s end; in 2006, the equivalent figure was 60 percent; and, by September this year, it was 40 percent.

These cash flows underpinned annual private equity returns of 41 percent, 40 percent and 21 percent for these vintages in the first six months of 2007. In light of these figures, it’s clear that there will have to be several years of extreme famine to wipe out the rich harvest gathered during the years of plenty.

From Salovaara’s point of view, private equity’s ‘golden era’ has been timely, coinciding with her efforts to ramp up Ilmarinen’s private equity allocation. Up until 2000, the firm had invested in private equity on an ad hoc basis, initially in local funds and then in pan-Nordic funds. Then it decided to bring in an investment team dedicated to private equity, which resulted in the appointment of portfolio managers Salovaara (in January 2000) and Jorma Tammenaho (the following November) to report to Esko Torsti, Ilmarinen’s head of alternative assets.

Initially the idea was to create a global private equity portfolio focused on developed markets. However, this was reconsidered and Ilmarinen ended up concentrating instead solely on European buyout funds. Salovaara explains why: “The classic model at the time was 60 percent Europe and 40 percent US. But we felt that all the evidence was in favour of Europe in terms of its stage of growth, the quality of the managers and there being a better balance between supply and demand. There was also a lot of restructuring and consolidation to be done on the continent.”

Fast forward to the beginning of this year and Ilmarinen launched a five-year plan to increase its exposure to private equity, from 2 percent of total assets under management (around €24 billion) when Salovaara joined in 2000 to a target of at least 3 percent at the end of the five-year period – though Salovaara thinks this latter figure may be a conservative estimate.

The strategy remains largely European-buyout focused, though Ilmarinen made its first commitment to an Asian fund earlier this year when it invested in KKR Asia, the first dedicated Asia vehicle launched by US buyout heavyweight KKR. Not that Salovaara could be described as a wild-eyed optimist when it comes to private equity’s prospects in the East. “In Asia, it’s the financial and regulatory frameworks that matter most. The opportunity is great but the risks are in line with that. You can’t simply translate fast GDP growth into higher private equity returns.”

If Ilmarinen’s stance on Asia tells you anything it’s that here is an organisation that doesn’t like to be rushed in its decision making. Salovaara says she welcomes the current “pause for breath” for that very reason. “At the larger end, the pace of investment has slowed, which should mean that you won’t see GPs coming back for new funds every two years. From our perspective, that’s healthy.”


Head office: Porkkalankatu 1, Helsinki, Finland,
Contacts: Katja Salovaara (portfolio manager, private equity);
Jorma Tammenaho (portfolio manager, private equity)
Assets / funds under management: €24bn
Allocation to private equity: 2%, increasing to at least 3% within
next five years
Year first invested in private equity: 1994
Number of private equity funds committed to: 70
Investee funds include: Apax Europe VI (2005); AXASecondaries Fund II
(2001); Hg Capital V (2005); KKR European Fund II (2005);
Nordic Mezzanine I (1999); Permira Europe III (2003)