Two of Sweden’s largest state pension buffer funds have called for yet more flexibility regarding their ability to invest in illiquid asset classes.

AP1 and AP4 urged the Swedish government to extend the buffer funds’ permitted investments in response to a proposal to reform their investment rules regarding illiquid investments.

AP4 acknowledged the proposal’s stated purpose of increasing the cost-effectiveness, return opportunities and long-term perspective regarding investments in illiquid assets. The rule changes would also give the four funds similar conditions to other comparable institutional investors, it said.

However, the SEK349bn (€32.9bn) fund added: “The proposals that are presented continue to have major limitations and do not provide opportunities that are needed to achieve the desired purpose.

“It is important now to create a regulatory framework that provides sufficient flexibility for AP funds to operate in a rapidly changing financial market for many years to come.”

The fund referred to proposals it had put forward in October 2017, in a response to an earlier set of draft rules.

These included adding to abilities to:

  • make co-investments in unlisted companies;
  • invest in infrastructure companies in the same way as they can real estate companies; and
  • invest in unlisted credit and sustainability-oriented investment opportunities.

AP4 said most opportunities in the latter category were unlisted and therefore not investable under current rules.

“With the changes AP4 proposed in its previous referral statement, the AP funds’ investment regulations should include both cost-effectiveness [and] increased opportunities for return-based investment,” the fund said.

It added that the ideas it proposed in 2017 would, to a much greater extent, correspond to the flexible rules currently in force for other similar institutional investors.

Meanwhile AP1, which managed SEK324bn at the end of 2018, said it considered the government’s latest reform proposal to be positive and advocated putting the proposals into force.

However, it also said the funds should be given more flexible rules in order to meet the aim of the memorandum.

“Some details of the proposed investment rules will lead to the AP funds losing out on investments with attractive return potential, such as, for example, direct investments in unlisted companies in the final stages prior to a stock exchange listing or in unlisted infrastructure companies,” AP1 stated.

Other rules would lead to higher costs for the funds, it said, citing the fact that they always had to use pooled vehicles to gain access to the illiquid credit market.

“Certain rules also risk quickly becoming obsolete in today’s changing financial markets,” it said. “With the rapid development of technology, it is difficult to predict what types of asset types and forms of investment will be available in just a few years.”

The funds’ demands come after their investment rules were relaxed as part of changes implemented at the start of this year.

The consultation on the proposals ends today.

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