Case study: AP6

Sweden’s private equity national buffer fund AP6 has posted stellar returns over the past five years and its domestic investment remit was recently liberalised, reports Maha Khan Phillips

For Sweden’s sixth national pension fund (AP6), investing in private equity is as much about benefiting Swedish businesses as it is about making large profits. “We have a very special and unique mandate, which is to help small and mid-sized Swedish companies get structured capital,” explains Adam Laurén, (pictured right) senior vice-president and CFO at the SEK19.6bn (€2.1bn) fund.

It seems the fund is managing to do both. AP6 returned 13.1% in 2007 - 4.1% over its target return for the year. Over the five-year period 2003-2007 the fund returned 11.1%, and expanded into several new business areas. Laurén believes this year may be different. “Looking forward in 2008, we hope we will make some new investments, depending on developments on the financial markets. But we think we’ll primarily focus on growth in our current investments. At the moment, the price level seems to be high for buyout companies.”

The fund, which focuses on investing in small to medium-sized Swedish companies in the buyout, venture and mixed equity (listed smaller companies) segments, has six different business areas, focusing on the direct and indirect markets.

AP Fund Investments is the largest, making up 34% of total capital. “Fund Investments makes indirect investments through private equity funds, but also on the public listed market in companies that are focused on small to mid-sized firms,” says Laurén.

In contrast, AP Direct Investments, which makes up about 33% of the capital, is focused primarily in the buyout area, and the fund adopts a very hands-on approach, often by putting in professional boards and bringing in consultants to focus on business development. “The companies should have a strong market position, and we are very involved in their management,” Laurén adds.

The fund also has a partnership business, AP Partner Investments, which accounts for just 8% of assets. “With AP Partner Investments we’re not always involved directly on the boards of the company,” says Laurén. “We invest together with a partner who takes responsibility for that. The partners have their own experience from their own backgrounds, which are either technical or customer related, so we find a partner that has the right experience for that particular company.”

Its fourth business division, AP Life Science, holds about 10-11% of capital and invests in private equity funds and companies that are involved in pharmaceuticals, biotechnology and medical technology. Laurén says that life science had to be rolled into a separate business division because “the life science sector is extremely specialised with very long-term investments”.

The fund has also established new areas for growth, primarily through its convertible bond offering. “We have established a new area of business where we lend money during succession,” says Laurén. “If an owner leaves the company, then we lend money to the successor and, as security, we have a bond and the right to convert the loan to shares if the sum of the agreed terms are not fulfilled. In Sweden we have many small companies, and in 15 years succession will become a problem because people running them are quite mature.”

The fund has also established AP Network Investments, which looks at small companies at the beginning of their growth that have their own cash flow. “They should have a product and they need to be commercial. They must have a customer base, so it’s not early stage venture capital.”

To offset its market risk and manage excess liquidity, AP6 has a treasury department that invests in fixed income, hedge funds and convertible bonds. AP Direct Investments also has its own real estate portfolio to offset its venture capital investing.

And AP6 could branch into new directions, at least geographically, in the future. In recent legislation the Swedish parliament lifted restrictions on cross-border private equity investment, paving the way for AP6 to invest more of its portfolio overseas. Currently, it has a small allocation to Nordic countries and a German real estate portfolio. “The new legislation encourages us to focus on the Nordic market,” says Laurén. “But it doesn’t say you can’t invest elsewhere. Our investments on the real estate side do invest in the German market so we have used the mandate to invest outside Sweden.”

But he does not think AP6 will spread its wings too far, pointing out that the fund’s ultimate objective is to help small to medium-sized companies in Sweden. Still, he says: “We were quite keen to have the legislation. In a global world, it is necessary.”