It is only relatively recently that institutional investors have begun to see private debt as a distinct asset class in its own right. Although historically it might have been bundled into allocations to alternative assets, or perhaps seen as part of the fixed-income stream, as the asset class has matured more investors allocate to it on a standalone basis.
All of which makes the decision by PensionDanmark, one of Europe’s largest pension funds, to merge its alternative assets and private debt capabilities seem rather baffling. PDI spoke to its new head of alternatives, Kim Nielsen, to understand the logic behind its new approach.
Perhaps most crucially, the shake-up does not alter the way the fund sets its allocation to alternative assets.
“Alternatives are still a very important part of the overall asset allocation in PensionDanmark,” says Nielsen. “The combined team will allow us to have more flexibility in assessing whether a debt or an equity investment will fit PD’s investment and risk profile best if it is possible to invest across the capital structure.”
According to PDI data, PensionDanmark has €31.5 billion of assets under management on behalf of more than 730,000 members. Private equity, private debt, real estate and infrastructure account for a substantial 24.3 percent of its current allocation. Although private debt, at 2.5 percent, is the smallest component of this, it still accounts for €787 million of investment.
The new alternatives team will work together under Nielsen’s leadership. However, it will be split into three focus areas covered by specialist investment professionals: a private funds team focused on investing in private equity funds; a direct equity team that will focus on real assets equity investments, primarily in infrastructure but also private equity co-investment in the Nordic region; and a private debt team that will focus on direct credit investments, co-investments, and investments in credit funds.
PensionDanmark believes the new structure will create better synergies and knowledge sharing, particularly between the private debt and direct equity teams. Both have built up significant sector knowledge and structuring skills, and it is hoped that combining them will free up staff to focus on new investment opportunities.
Nielsen believes that being able to more precisely target different parts of the capital structure in deals – from senior debt through mezzanine and equity investments – will also bolster PensionDanmark’s ability to come up with an investment mix that can match its liabilities.
“It is important to have flexibility to target different parts of the capital structure in order to target the best risk-adjusted return for the pension fund,” Nielsen says.
“Transaction and market dynamics change all the time, and it may be possible to achieve better risk-adjusted returns by investing in a structured debt or equity tranche than outright investing in either equity or senior debt.”
This style of investing in private markets could becoming increasingly popular among large private pension funds in Europe. These institutions will need to be able to dynamically alter their risk-return profiles as their members age and shift towards lower-risk and lower-yielding investments to provide for their retirement.
As for what this means for future private debt investments, Nielsen says PensionDanmark will continue to view the asset class as a vital part of its strategy. Its aim is to target direct lending and co-investment opportunities as well as selective investments in funds, with a particular focus on structured credit and special situations. n