The large stake that Denmark’s ATP holds in ailing Swedish battery firm Northvolt has emphasised the dangers involved in gearing up an investment portfolio containing illiquid as well as liquid assets, according to a prominent Copenhagen professor of finance.
The DKK693bn (€92.9bn) statutory pension scheme is one of several major Nordic pension funds exposed to Northvolt, whose business has been hit by problems at its main factory and slowing plans by European carmakers’ move to electric vehicles.
Interviewed by IPE, Jesper Rangvid, professor of finance at Copenhagen Business School (CBS), agreed that recent news of serious business problems at Swedish battery company Northvolt had highlighted the fact that ATP’s heavy exposure to illiquid assets was a problem.
“I can’t say whether Northvolt was a good or bad investment; that’s not the focus of my point,” he told IPE.
“What I’m emphasising is the role of illiquid assets in a leveraged portfolio like ATP’s, and the potential risks of ending up allocating too much to individual illiquid assets,” Rangvid said.
At the beginning of last week, Northvolt announced swingeing cost-cutting measures including halting some operations, selling off at least one site, and warned jobs would be lost.
A spokesman for ATP, which owns around 5.3% of Northvolt according to its first-half 2024 report, referred IPE to the company itself when asked for comment about the investment, “out of respect for the ongoing process”.
Sweden’s four biggest national pensions buffer funds, AP1-4 – which together hold a 3.5% stake in Northvolt valued at SEK6bn (€525m) — said Northvolt was having ongoing dialogues with its investors.
Unbalanced portfolio after downturn
Rangvid said that back in 2019, he and colleague Henrik Ramlau-Hansen, associate professor in CBS’s department of finance, had warned that ATP’s highly-leveraged investment strategy could lead to an unbalanced portfolio after a downturn.
“The downturn then happened in 2022, when ATP lost 40% – three to four times more than other pension funds. This downturn caused an over-concentration in illiquid assets,” he said.
“A single-company illiquid investment may start as a good investment, but if liquid assets experience significant losses, that one investment could end up representing a disproportionately large share of the overall portfolio, if its value does not co-move sufficiently with the value of liquid investments and the overall portfolio,” Rangvid told IPE.
He said that the challenge was considerably larger with a highly-leveraged portfolio, where gains and losses on the liquid assets were very volatile, such as was the case for ATP.
“That’s the real issue here,” he said.
In February this year, Ramlau-Hansen and Rangvid argued in an opinion article in Danish newspaper Berlingske that the ATP scheme should be completely redesigned in order to achieve a higher return, taking aim at several aspects of its business model, including the high weighting of ATP’s free funds in illiquid assets.
In response, ATP chief executive officer Martin Præstegaard and the pension fund’s chair Torben Andersen said, inter alia, that they agreed there was too large a proportion of illiquid assets in the investment portfolio and that ATP had worked systematically to reduce that since 2020.
Rangvid told IPE ATP was right to try to reduce its exposure to illiquid investments, especially if it planned to maintain its highly-leveraged investment strategy.
“A strategy like this can lead to an outsized allocation to illiquid assets when liquid markets experience a downturn,” he said.
Inadequate
Asked whether ATP was doing enough in this regard, however, Rangvid said he and Ramlau-Hansen had long argued that ATP’s current product was inadequate.
“We believe the product needs to be fundamentally restructured, and when that change occurs, the investment strategy can shift towards one that relies less on risk parity and leverage,” the CBS professor said.
When IPE asked ATP for comment on Rangvid’s arguments, a spokesman referred to a recent response given by chief investment officer Mikkel Svenstrup in Danish publication Finans in response to the same points.
Svenstrup said: “As a long-term investor, we must always strive to strike the right balance in our investment assets.
“As previously announced, the proportion of illiquid assets in the investment portfolio is currently higher than we would ideally like,” he added.
“Since 2020, we have systematically worked to reduce the share, and that work took place before the latest development in Northvolt and continues independently of it,” Svenstrup said in Finans.
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