PFA sees opportunity in private markets

PFA Pension, Copenhagen, intends to increase its private market risk exposure in the second half of the year amid the ongoing coronavirus outbreak, the 560 billion Danish kroner ($81.2 billion) fund's group CIO, Kasper Ahrndt Lorenzen, said.

PFA's investments in private markets, which consist of infrastructure, real estate and private equity as well as private credit, stand at above 20% of the fund's strategic asset allocation, as well as its risk budget. Mr. Lorenzen in telephone interview said the pandemic's impact on markets, including central bank extraordinary interventions, have restricted his fund's plans to increase private market investments.

"From a strategic point of view we have more appetite for the safer more stable private market exposures, but it all comes down to valuations and expected return. Rates are low and the risk is not that well compensated," he said.

"We haven't seen the repricing of private markets exposures yet but it's coming soon. So there might be some good deals to look into in the second half of the year," he said, adding that real estate and infrastructure are areas of his interest.

"The fund's exposure will most likely go up in the second part of the year as private markets reprice slower," he said. Mr. Lorenzen noted that PFA Pension is fully invested currently, and to fund any increases in private markets, PFA will sell some public-market or other private-market exposures. He didn't specify the size of the increase he is anticipating making.

Almost half of the fund's private market investments are in real estate, with the remaining half invested in infrastructure, private equity and illiquid credit. The majority of PFA's private market investments are managed in-house to focus on costs, Mr. Lorenzen said.

Since his arrival at the fund in September 2019 from the 889.5 billion Danish kroner ATP, Hilleroed, Denmark, where he spent over a decade, Mr. Lorenzen said that comparing public market risk exposure to private market risk exposure and converting factors such as concentration or liquidity risk between the two has become a key focus in his job. Mr. Lorenzen was ATP's CIO before joining PFA.

Mr. Lorenzen said private market risk exposure has become key for long-term investors. "If you buy infrastructure on a risk basis, you have to typically sell some public market risk and it has become extremely important to have a common understanding of risk across the (liquid and illiquid parts of the) portfolio," he said by way of example.

Mr. Lorenzen said private markets take up more of the portfolio's risk budget and investors have more constraints because of efforts to keep fees low and limited human resources. Because of these constraints, he said: "You can't buy and sell easily. We have to say 'no' much more often."

Mr. Lorenzen said that after his arrival at the fund, PFA added 10% to 15% of overall risk to portfolio — the majority of which was equity risk — in January before the pandemic unfolded in Europe. The fund subsequently took risk off in late February as the pandemic accelerated. Since then, he said, the fund has re-added extra risk of 5% to 7% but missed out on some of opportunities.

Equity markets across the world started to climb up in the last two weeks, as concern about the spread of the coronavirus began to abate. The DAX index was up 12.5%, FTSE100 was up 5.8% and S&P 500 was up 5.2% on May 27 as compared to May 15.

"We have benefited from the rebound that is materializing right now to some degree but we didn't capture the full rebound," he said, adding that he was surprised by its size.