The state-run Sixth Swedish National Pension Fund (AP6) was established in 1996 as part of the national pension fund system.
As such, it is a so-called buffer fund, with no new money coming in, and none being paid out to pensioners. Its main purpose is to act as a reserve for other state funds against future years when a relatively small number of people in employment will be supporting large numbers of pensioners.
The fund’s investment mandate, drawn up by the Swedish Parliament, states that its preferred investment focus is in unquoted companies, investing both directly and indirectly. This makes it unique among the AP pension funds – the others are allowed to invest, but only indirectly, as passive owners.
The mandate also states that the fund must invest only within Sweden, in order to stimulate Swedish industrial growth.
The fund first invested in private equity in 1997. As at 31 December 2003, it was valued at SK12.8bn (e1.4bn), with SK7.3bn (57%) in private equity and SK5.5bn in cash.
The fund invests both directly and via funds of funds. Its investment strategy allows it to act as a hands-on investor both in unquoted portfolio companies and in part-owned external private equity funds (ie, where it is a limited partner).
AP6 supports both venture capital and buy-outs.
At the end of 2003, its private equity portfolio was split between life sciences (30%), technology (12%) and buy-outs (57%). Both primary and secondary investments are used.
“The portfolio is diversified by building up what we believe to be the optimum asset allocation based on the risk/return ratio,” says Stefan Holmgren, the fund’s chief financial officer. “From the point of view of return, our experience so far has been good. Since 1999, in every year – apart from 2002 – we have enjoyed positive returns from our private equity portfolio.”
From the beginning of 2003, the fund’s target return was redefined as an absolute return.
“Until 2002, the target was linked to the Stockholm Stock Exchange index SIX,” says Holmgren. “But as the proportion of private equity had reached more than 50% of the capital, the fund board thought it would be more appropriate to go with an absolute return target.”
This new target is based on the risk-free interest rate – defined as the repo rate – plus a risk premium. In 2003, the target return for the private equity portfolio was 9.7%, and the absolute return achieved for that year in the private equity portfolio was 14.6%. So the fund outperformed its target by 4.9%.
Holmgren says: “Since the fund is an active owner, the hard part has been all the hands-on work carried out both in our portfolio companies, and in our role as limited partners in part-owned external private equity funds.”
He says the main lesson learned by the fund has been the importance of relationships.
He says: “As a large investor in a
small market such as Sweden, we
think it is
crucial to maintain a close relationship with the external funds managing our money, as well as with the portfolio
companies which we finance. Being a proactive owner is a vital factor in enhancing our return.”
Over the next few years, the fund aims to further increase its investments in private equity, since this is its core business as defined by statute.
“The fund will continue to focus on private equity, with the intention of increasing both the percentage of the portfolio invested in private equity, and the return,” says Holmgren. “We will also be seen more actively in the Swedish private equity secondary
market, both as buyers and sellers, in order to reallocate the portfolio where necessary.”

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