Former Danish prime minister and member of the European parliament, Poul Nyrup Rasmussen, is one of Denmark’s most outspoken opponents and has sparked a country-wide debate over pension funds’ interest in the asset class. He believes there are certain kinds of funds that investors should steer clear of, with leverage buy-out funds top of his list.

“The job for pension funds is to ensure that workers’ money is taken care of and that high and sustainable returns are achieved,” he says. “But pension schemes have to be sure that the funds they invest in follow ethical guidelines. Investors have to be demanding instead of naively handing over their money.”

Uphill struggle

Mr Nyrup Rasmussen also believes private equity firms’ use of high fees actually limits returns, with only 10 per cent to 15 per cent of all private equity funds being capable of delivering above market results.

“It’s a lucky punch if you manage to select any one of these firms,” he says.

Mr Nyrup Rasmussen’s criticisms have been fuelled by unpopular buy-outs in the domestic market. For example, the attempted takeover of Danish telecom group TDC by five private equity firms, including Blackstone Group and Providence Equity Partners, which was halted by the Danish supplementary pension fund ATP, has created a lot of bad press for private equity firms and sympathy for ATP.

Others are even more hesitant about pension funds ploughing money into private equity. Michael Møller, professor at the department of finance at the Copenhagen Business School, believes investors should stay away from the sector altogether.

“My advice is that pension funds should be very careful and rather sceptical about private equity investments. If I were looking after other people’s money, I would be cautious about investing in private equity,” he says. “You tend to pay too much for services that are rather doubtful and, with such a varying level of market returns, it’s difficult to know what you’re getting.”

Unsurprisingly, pension fund managers do not share his concerns. Indeed, worldwide, some 40 per cent of money going into private equity comes from pension funds and insurance companies.

“Obviously, I don’t agree that we should stay away from private equity, but I think you have to be cautious about all kinds of investments,” says Claus Jørgensen, head of equities at PKA, the €16bn pension fund company.

However, Mr Jørgensen recognises that costs are high and says you have to be sure you are securing good enough returns to cover the high fees.

Prof Møller admits that some pension funds may be capable of getting better than average returns from the market, but believes this is not the case for the majority.

“There are only benefits if you are very good at picking the right managers and I doubt all pension funds are,” he says.

Finanssektorens Pensionskasse (FSP), the €3bn pension fund for financial sector employees, has invested in private equity for 15 years. It has some 5 per cent allocated to the asset class.

“Maybe private equity is riskier and requires more management than other asset classes, but we think it’s an interesting investment and an attractive market. Not all asset classes have the same kind of returns,” says FSP’s managing director, Steen Jørgensen.

Michael Dyrlund, portfolio manager at FSP, adds that buy-outs, in particular, have a low correlation to the equity market and are therefore an attractive addition to the portfolio.

Indeed, the fund’s private equity program has been quite a success story with returns of just under 30 per cent in 2007 and average returns of 10.1 per cent over the past 15 years.

“We are satisfied with returns of between 10 per cent and 15 per cent,” says Mr Dyrlund PKA has 3.5 per cent allocated to private equity, but a target of 7 per cent, which it aims to reach in about three years.

“It’s an attractive asset class from a risk/return perspective and we believe it generates good returns over the long run. I expect it to perform quite well compared to listed equities – about 3 per cent to 4 per cent more,” says Mr Jørgensen at PKA.

But Prof Møller doubts whether pension funds are capable of navigating the large number of private equity managers.

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