The total value of Dutch pension funds’ private equity investments has exceeded the €100bn mark for the first time ever, according to data from pension regulator DNB.
Dutch funds’ private equity investments have doubled in three years’ time, from €50bn at the start of 2019 to €102bn at the end of the second quarter of 2022. The main reason for the rise was the asset class’s stellar returns, though some pension funds have also increased their allocation to private equity.
At the same time, the value of pension funds’ public equity investments has decreased notably: from €565bn at the end of last year to €405bn by the end of June.
As a result, private equity now accounts for 20% of all Dutch pension funds’ equity investments. This prompts the question of how long pension funds can continue allocating more money to private equity while at the same time taking heed of their liquidity requirements.
Civil service scheme ABP and healthcare fund PFZW are the Netherlands’ biggest investors in private equity, both in absolute and relative terms with each having increased their allocation to about 10% of their portfolios in recent years.
Both funds together account from some two thirds of Dutch pension funds’ private equity investments. ABP now invests about a quarter of its assets in non-listed investments.
Eventually, the amount that can be invested in illiquid assets will reach a cap, said Thierry Rozier, an investment consultant at Aon.
“How much this is, depends on many factors such as the size of your derivatives portfolio. The more derivatives you have, the more liquidity you need for collateral. Additionally, it depends of the age of your population and the amount of contributions coming into the fund,” he added.
In general, a pension fund with a young membership can invest more in illiquids than a scheme with a lot of pensioners and few incoming contributions.
Neither €486bn ABP nor €229bn PFZW have sold any private equity investments this year, despite the growth of their non-listed portfolio. According to a PFZW spokesperson it is “complicated” to sell because of the illiquid nature of these assets.
Private equity transactions resume
Private equity transactions have all but dried up this year due to uncertainty around valuations. While sellers were sticking to last year’s high valuations, buyers wanted a discount accounting for the changed macroeconomic environment.
However, Scottish investment manager Baillie Gifford is seeing life returning to the buyout market.
“Over the last eight months or so we didn’t see anything exciting, but now opportunities are coming in,” said Robert Natzler, manager of the firm’s Schiehallion fund which invests predominantly in privately held firms.
“I think this is because the penny has dropped: companies are now willing to accept lower valuations,” he added.
Valuations
The strong rise in value of private equity assets compared to listed equities is mostly due to diverging returns on the asset classes this year. Whereas listed equities have corrected strongly because of rising interest rates and rampant inflation, this hasn’t (yet) been the case for private equity.
“The impact of higher interest rates indeed has not yet been reflected in private equity valuations. The question is what will happen here now,” said Michel Iglesias del Sol, chief investment strategist at fiduciary manager Kempen.
Aon’s Rozier noted changes in valuations in public markets tend to be processed with a delay in private markets (see box).
“Eventually we will see a certain response. One way or another, the fall in valuations in public markets will have to be processed in private markets too,” he said.
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