Exotic Debt Trap Spurs Danske Bank Pension Fund Review

The pension unit of Danske Bank A/S, Denmark’s biggest lender, is setting aside 5 percent of its $60 billion under management to escape credit markets it says may suffer a price shock.

Danica Pension will use the funds to accelerate purchases in private equity and other assets less exposed to market froth, Chief Financial Officer Jacob Aarup-Andersen said in an interview. The fund is targeting investments with a closer price link to the “real economy,” he said.

“If I had to list the number of exotic deals that have been proposed here at almost no extra yield, it is quite phenomenal,” he said. “The moment yields disappear in one asset class, people just move on to the next. It’s hard to find yield, and we don’t want to be blind and just chase yield down the curve.”

An unprecedented period of monetary easing across most of the developed world is distorting asset prices, the Bank for International Settlements said in June. Bonds in the Bank of America Merrill Lynch Global High Yield Index soared to a record of more than $2 trillion in July. So far this month, the index has delivered investors a 0.01 percent loss, according to data compiled by Bloomberg.


“The sort of things that have been suggested with limited yield versus safe instruments is just mind-boggling,” Aarup-Andersen said. “No one would have suggested these things two or three years ago.”

In addition to unlisted companies, Danica and similar investors, including Denmark’s biggest commercial pension fund PFA, are turning to infrastructure and direct lending.

Danica spent 400 million kroner ($73 million) last month on a stake in closely held Unifeeder A/S, a Danish logistics and shipping company, from private equity fund Nordic Capital. PFA said in March it will set aside 15 billion kroner ($2.7 billion) for private equity investments.

Denmark’s biggest pension fund, state-backed ATP, has also been adding to its private equity portfolio. It bought a 5 percent stake in unlisted utility Dong Energy A/S last year. PFA purchased 2 percent in the same transaction.

Wealth Fund

There’s “more in the pipeline,” Jesper Langmack, managing director of PFA Asset Management, said by e-mail.

Sampension, a Danish fund with $36 billion in assets, says it hopes to lower its costs by teaming up with partners for its private equity goals. The fund also has “increased interest in direct investments primarily within real estate and infrastructure and alternative energy, where we target low-risk assets,” Anne Charlotte Mark, Sampension’s head of equities and alternatives, said by e-mail.

Norway’s $890 billion sovereign wealth fund has been lobbying the government for permission to add private equity and infrastructure to the list of assets it’s allowed to invest in. Currently, the fund -- the world’s biggest of its kind -- can only hold stocks, bonds and real estate.

In Sweden, the government is preparing to allow funds managing more than $170 billion pension assets to move into private equity and infrastructure, Financial Markets Minister Peter Norman said in March.

Investors too exposed to bond markets may face disruptions across all risk levels, Aarup-Andersen said.

“The moment people start pulling liquidity out of the tail end of the curve, it will just reverberate all the way back,” he said.

Ditching Middlemen

Investments that are grounded in economic developments are safer, he said.

“We see a real economy that is improving,” he said. “The Danish economy is starting to grow again.”

Denmark’s economy expanded the most in more than three years in the first quarter as fixed investment and consumer spending recovered. The government in May raised its growth forecast for 2015 and now sees gross domestic product expanding 2 percent, faster than the European Commission’s 1.7 percent estimate for growth in the euro zone.

Companies are looking both for direct loans and equity, Langmack said. PFA has chosen to invest only as a minority shareholder and “with a clear exit route built into all the deals,” he said.

Pension funds are also increasingly looking to bypass private equity funds when investing in unlisted assets, Aarup-Andersen said.

“If I write a billion-krone check, I have to pay 20 million kroner every year on an ongoing basis,” he said. “I can hire a lot of Danish lawyers for 20 million kroner, and I don’t have to pay them every year.”

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