THEMATIC RESEARCH PAPER SERIES #2 // DECEMBER 2018 · Thematic Research Papers Series Dear...

THEMATIC RESEARCH PAPER SERIES #2 // DECEMBER 2018

LIQUID ALTERNATIVES

// P. 6

PRIVATE DEBT & PRIVATE EQUITY

// P. 8

THE REALASSET GAME

// P. 10

2

Thematic Research Papers Series

Dear Investor,

We are proud to present the second edition of the 2018 Thematic Nordic Research Paper Series (TRPS). This edition focus specifically on alternative investments, and moreover which types of alternative investments Nordic investors finds most attractive in the current market environment.

As every year, the TRPS data is based on information gathered in conjunction with our annual Nordic Intelligence research and represent unbiased feedback from leading investors in the Nordic investment community. The TRPS is reserved for asset owners in the Nordic region, and is only distributed to key decision makers with the Nordic institutional space.

We highly appreciate the feedback we receive from the institutions that over the years have contributed to our research and we hope that you will find the conclusions of interest.

We are as always available to follow up, if you should have questions to this research.

We hope you will enjoy reading the TRPS.

Thank you.

Kirstein

DISCLAIMERThis report has been carefully prepared by Kirstein A/S. The contents hereof are based on sources of information believed to be reliable, and we have done our utmost to ensure that the contents are correct and accurate, although no warranty or declaration, neither explicit nor implicit, is given as to their accuracy or completeness. Kirstein A/S disclaims any liability for loss, damage or inconvenience of any kind, either directly or indirectly, resulting from the use of the information con-tained in the report. This report is intended for investment professionals only. Please note that the report is to be considered confidential and may only be employed in your own entity and for the purpose that this report has been made. Furthermore, the report is subject to the Danish general rules on intellectual property rights and representation or reproduction of the publication or parts hereof are only permitted to the extent allowed by the Danish Copyright Act or with Kirsten A/S’ consent. The underlying data and information col-lected and used in the analyses are the property of Kirstein A/S and are therefore not an explicit part of our service. Kirstein A/S thus retains all intellectual property rights regarding the data and information that form the basis of the contents of this report. This report is governed by Danish law and subject to the jurisdiction of the Danish courts.

Jesper KirsteinFounder, Kirstein A/S

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#2 Many Different Routes to Alternative Investments

Introduction Nordic investors’ level of interest across all types of alternative investment opportunities remains intact in 2018. The expected search activity is significant and interest is currently peaking in many of the asset classes.

The three most popular sub-sectors have been private debt, private equity and infrastructure, although, taken as a group, real assets (infrastructure and real estate) often make up more than 50% of the total alternative as-sets within Nordic investors’ current portfolio.

The interest is intact across both countries, types and sizes of the Nordic investors, although the approach to alternatives differs significantly. The largest organisations continue their up-scaling of in-house resources, but increasingly also carry out club-deals with local peers in relation to local projects. International investment

continues to be with the largest brand names in the alternative space. On the other hand, smaller investors continue to find it difficult to access alternatives directly and hence seem to value access to investments over product quality.

As Figure 1 shows, the aggregated attractiveness score consists of the following four parameters:

Investors’ level of interest in an asset class Expected searches in an asset class Competition within an asset class Amount of assets externally managed

Figure 1. Decomposed alternative asset class attractiveness

Source: Kirstein A/S

Multi-Asset RiskPremia

Hedge funds Real estate Infrastructure Private equity Private debt

Interest Mandates Competitive situation Outsourcing rate

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Research Panel This research has been prepared by Kirstein A/S and is based on interviews and quantitative data from 116 institutional investors based in five Nordic countries (Denmark, Finland, Iceland, Norway and Sweden). The investors were selected to create a representative universe of the full Nordic market in terms of number, size and origins. The participating investors hold various positions, from CIO to manager selectors and portfolio managers.

The combined assets of the surveyed investors amount to EUR 1,276bn. A breakdown of the inve-

stors is shown in Figure 2.

Figure 2. Breakdown of Research Panel

To include opinions from as many seasoned investors as possible in this research, pension funds represent 41 of the participating investors and two thirds of the surveyed assets. Danish and Swedish investors account for close to half of the asset base in this research, while the partici-pating investors in Iceland tend to be smaller in size and only account for a small part of the surveyed assets. Fin-nish investors account for one fourth of the asset base, even though they only constitute 12% of the participating

investors. Finally the Norwegian investors represent a significant part of the investor base, however with limited assets. Overall, we consider the surveyed group to be a representative peer group of Nordic investors, offering a sufficiently robust selection to show how the Nordic market is moving in terms of trends and tendencies.

Nordic asset allocation The search for yield remains one of the primary drivers behind current asset allocation and portfolio construc-tion throughout the Nordic region. Therefore, most in-vestors are looking for new alternatives and exploring opportunities through more risky asset classes. Danish and Finnish investors continue to lead the way in alter-native investments, with large allocations to real estate, real assets, and private debt.

2932% 41

66%14

23%26

32%

3

24

2%

18

12%

26

32%

25 25

Investorsby country

TotalAUM

Investorsby type

TotalAUM

Distributor

Sweden

Norway

Iceland

Finland

Denmark

Distributor

Non-pension

Insurance

Pension funds

116 €1,276bn 116 €1,276bn

Overall, we consider the surveyed group to be a representative

peer group of Nordic investors, offering a sufficiently robust

selection to show how the Nordic market is moving in terms of trends and tendencies.


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During 2017, Nordic investors’ equity allocation re-mained on par with previous years, with an average al-location of 45% among the peer group. Danish, Swedish and Norwegian investors have a high allocation to global equity, whereas allocations to developed-market strate-gies are rather subdued outside of Finland.

Data indicates that within developed equity, alloca-tions to European equity have increased relative to US equity. As in global equity, emerging markets equi-ties continue to play an important role in institutional portfolios, particularly among Danish, Norwegian and Swedish investors.

Allocations to fixed income remain around one third of the total assets in the Nordic region, with the exception of Denmark where we see an allocation of 45% to fixed income. Asset liability management and solvency require-ment remains the most common reasons for allocating to

investment grade, whereas investors still allocate to high yield and emerging market debt to enhance returns.

The share of alternatives remains fairly large, which is not least driven by high allocations to real estate in Denmark and Norway, where the asset constitutes almost 8% of the total portfolios. Private equity remains a cornerstone for many investors, who are increasingly also adding private debt.

Figure 3. Nordic Asset Allocation

The share of alternatives remains fairly large, which is not least

driven by high allocations to real estate in Denmark and Norway,

where the asset constitutesalmost 8% of the total portfolios.

35%42%

57%

45%

45% 35%

34%

35%

7%8%

4%

5%

11%

4%

3%

8%

2%11%

2%7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Denmark Norway Sweden Finland

Equity Fixed Income Real Estate Alternatives Other


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Liquid AlternativesLiquid alternatives have been a key topic for many Nordic investors, although rather fragmented interest levels can be observed in the Nordic region.

The majority of Swedish and Finnish investors are seasoned in the hedge fund space, and Danish

investors have gradually been following suit. In Finland, allocations to hedge funds are often a combination of internal alpha teams and a long range of external specialist firms. In light of recent years of less than stellar per-formance of the hedge fund industry as a whole, many investors have in recent years been taking down allo-cations. The search activity for hedge funds is hence rather subdued, and the majority of interest relates to true uncorrelated setups such as CTAs or option-based strategies. Some asset managers have been successful in positioning credit hedge funds with investors, which is a trend we expect to continue.

Asset managers used in the hedge fund space is rather diverse, from the leading global brand names to very specialist hedge fund managers. Often fund of funds are used to gain access to blue chip managers that are otherwise closed to the public.

ALTERNATIVE RISK PREMIAIn recent years, sell-side marketers have been promo-ting hedge funds in the disguise of alternative risk premia / factor solutions. While 2016-2017 saw a strong wave of activity in Alternative Risk Premia, appetite for this sector has now settled down to a more gentle pace after many investors have made allocations to a few of the leading US firms.

Looking forward, we expect the abovementioned trends to continue—however with investors focused on making allocations to liquid diversifying strategies or taking portfolio-level action to mitigate the risks their portfolios face in the current market environment.

While 2016-2017 saw a strong wave of activity in Alternative Risk Premia,

appetite for this sector has now settled down to a more gentle pace after many

investors have made allocations to a few of the leading US firms.

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Value. Shared.For fund distributors and professional investors use only. Investing involves risk. The value of an investment and the income from it may fall as well as rise. *The Fund was launched in October 2017 and is based on the Composite which was launched in September 2005. The Fund mentioned is a sub-fund of Allianz Global Investors Fund SICAV, an open-ended investment company with variable share capital organised under the laws of Luxembourg. Past performance is not a reliable indicator of future results. Investment funds may not be available for sale in all jurisdictions or to certain categories of investors. For a free copy of the sales prospectus, incorporation documents, daily fund prices, key investor information, latest annual and semi-annual financial reports, contact the issuer at the address indicated below or www.allianzgi-regulatory.eu. Please read these documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt / M, registered with the local court Frankfurt / M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). 18-1873

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8


The Rise of Private Debt In the alternative space, very few asset classes are more vividly discussed than private debt and the long range of sub-asset classes that exist in this area.

Private debt is by many Nordic investors still perceived as an attractive asset class when seeking to capture

illiquidity premia and also long, stable cash flows. Allocati-ons to private debt have surged since 2013, and today the asset class has for many investors risen from consisting only a minor share to a more significant share of total assets.

DIRECT LENDING Investors in Sweden and Finland perceive direct lending as the most attractive asset class, and a lot of investors have made new commitments in the past couple of years. The most seasoned investors often mention that private debt is quite late-cycle. That said, given the limited op-portunities for investors in both the listed and unlisted space, assets continue to flow into private debt. This has resulted in a doubling of the search activity in the Nordic region since last year. In Denmark, investors have for a long time preferred senior bank loans to direct lending, which is why senior bank loans continue to account for close to three quarters of allocations to alternative credit.

Established US loans managers have taken up the majority of the private debt market as of today, although a number of European mid-market managers have seen inflows in recent years. In aggregated terms, very few in-vestors make allocations directly, and often work with a limited number of very large brand names—often asset managers with an established private equity background.

REAL ASSET DEBTThe resurgence of appetite for “real asset debt” (infra-structure debt and real estate debt) has been one of the most coveted themes to investors in recent years.

However, the asset class has never been able to attract significant flows from Nordic investors. The conclusion is clear: investors indicate the highest level of interest in direct lending and senior bank loans in favour of real asset debt.

Figure 4. Expectations for Real Asset Debt 2013 2018Private Credit 3.0 2.9- Infrastructure Debt 2.6 2.3- Real Estate Debt 2.9 2.5- Direct Lending n/a 3.3- Senior Bank Loans 3.5 3.8

As seen in Figure 4. some of the larger pension funds in 2013 indicated a high level of interest in infrastructure and real estate debt, whereas the attention in 2018 is more focused on other alternatives, and consequently, these in-vestors indicate less interest in infrastructure and real esta-te debt investments. Nordic investors are less seasoned in infrastructure debt and real estate debt compared to its Continental European peers. Some have a positive view of both infrastructure debt and real estate debt investments’ ability to reduce the volatility in the overall portfolio, while others indicate that hedging costs and liquidity are hurdles.

OTHER TYPES OF STRUCTURED CREDITA growing number of structure credit strategies are introduced to Nordic investors every year, often focusing on different markets, sectors and liquidity levels. From shipping fi-nancing to regulatory capital, a wide range of opportunities are available in the market. Granted, the idea generation is to a large extent sell-side driven, but many Nordic investors have executed new mandates in this area in recent years.


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The Future of Private EquityNordic investors indicate that private equity is the second most attractive sub-asset class in the alternative space, irrespective of countries, types and size of institution.

Many investors have in recent years gone out of public equity and into private equity, and as a

consequence, many have a fully running private equity program today. Returns and reduction of equity beta are often set forth as arguments for continuing the allocation.

The market for private equity furthermore continues to receive flows from both reinvestments as well as new commitments. This creates opportunities to access the top-tier managers even more difficult for investors, but also more difficult for private equity managers in terms of deployment of capital.

Few investors are for regulatory reasons allowed to take majority stakes in unlisted companies, and there-fore private equity is predominantly an external game. A wide range of top-tier global private equity funds take up the lion’s share of Nordic assets, but also local players with a Nordic focus can be found within Nordic investors’ portfolios. Boutique private equity firms are often chal-lenged in a Nordic context as global access to deals flows and/or funds is perceived as quintessential.

The market for private equity

furthermore continues to receive flows from both

reinvestments as well as new commitments.

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The Real Asset GameLooking at allocations as well as Nordic investors’ level of interest in real assets (real estate and infrastructure), the prospects of the asset classes are very positive.

INFRASTRUCTURE Interest and flows have for many years favoured infra-structure investments globally, and the investment case still seems clear to the majority of investors in the Nordic region. Danish and Swedish Tier I investors continue to lead the way for the rest of the Nordic region, although Tier II is also gradually becoming seasoned in the asset class.

The largest of the Nordic investors continue to invest directly, in clubs, or via subsidiaries of Nordic pension funds. Economies of scale are the main argument for cooperating with fellow pension funds. Smaller investors often choose to either invest on the back of the largest investors, or go into business with international fund

of funds providers. A number of the global investment bank-related managers have been successful in provi-ding a full platform for alternative investments, but also US and Australian firms have succeeded in raising sub-stantial assets in the Nordic region. REAL ESTATEReal estate remains a premier allocation to the majority of Nordic investors, and investors often do not classify property portfolios as part of the alternative bucket. As a consequence, investors maintain sizeable allocation hereto. The level of interest is strongest among the Danish, Swedish and Norwegian investors.

The bulk of investors take an active ownership of the local core properties they own, and outsource facility management to third parties. For international core pro-perties, external managers are still widely used. That said, the leading investors on the property side have been buying up European core properties in recent years at rather low single digit return targets.

Following recent years of strong performance of real estate (globally), opportunities and return potential has been lowered in most part of the core part of the pro-perty landscape. As a consequence, many Tier I inve-stors have been moving into value-added projects in the suburbs of Stockholm, Oslo, Copenhagen, and Helsinki.

Also an internationalisation of property portfolios is taking place, often in cooperation with leading property managers.

Smaller investors often choose to either invest on

the back of the largest investors, or go into business with

international fund providers.

11


For more information visit columbiathreadneedle.comImportant information: For professional investors only. Your capital is at risk. Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. 12.18 | J28765

Ulrik Holm Oxfeldt, Head of Nordics E: [email protected] T: +45 88 43 21 36

Victor Rozental, Sales Director Nordics E: [email protected] T: +46 8 502 565 38

n Active asset management: to protect value, optimise recurrent yield and capitalise on growth opportunity and industry disruption. In the constantly changing environment we operate in, infrastructure investors need to understand innovation. They must also identify dominant trends and have the expertise to take advantage of the positive returns that may be gained from technology disruptors across all infrastructure asset types. More importantly, they must also have the flexibility to keep investing in the assets to capture this additional value over the medium to long term.

n Systematic portfolio construction approach: focusing on each new investment’s additivity from a risk-return perspective. Rather than defining our investment opportunity set by simple sectoral and geographic classifications

and private-equity style labels (such as core/core+/value add), we use dynamic portfolio construction techniques to deliver portfolio diversification and volatility control. This helps achieve steady yield and capital growth through varying macroeconomic conditions, even in times of market volatility.

n Sustainability and attractive long-term returns in infrastructure go hand in hand, therefore true integration of all aspects of Environmental, Social and Governance (ESG) as a selection and risk management tool in the investment process is key to delivering the desired outcomes. If an asset is both ecologically and socially sustainable, there is less risk of negative intervention by politicians or regulatory bodies over the asset’s long-term lifecycle. By doing good, investors will do well.

Our investment approach challenges the common misconception that investing in infrastructure will automatically deliver the characteristics which typically attract institutional investors. We firmly believe that in a constantly changing environment, the ability to construct and actively manage a diversified portfolio, in an open-ended structure – unconstrained by a predetermined investment period and exit timing – is key to navigating the sustainable, long-term ownership of infrastructure assets. Investors will benefit from an aligned investment approach which incorporates the following key elements:

Sustainable infrastructure: a virtuous circle

Ingrid Edmund, senior portfolio manager

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Jan [email protected]+45 33 18 99 55

Casper [email protected]+45 33 18 99 57

THEME PUBLISHED

NORDIC #1 The Approach to Equity Investments October 2018

NORDIC #3 Nordic Rotations in Fixed Income January 2019

NORDIC #2 ManyDifferentRoutestoAlternativeInvestments December2018

NORDIC #4 ESG Integration in Nordic Context February 2019

NORDIC #5 Developements in Risk Premia April 2019

NORDIC #6 The New Wave of ESG: SDG June 2019

For more information

Nordic TRPS

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