ANNUAL REPORT 2016 MMXVI
ANNUAL REPORT 2016 MMXVI
PKA AIP ANNUAL REPORT 2016 — MMXVI PKA AIP A/S Rosenborggade 1B DK-1130 Copenhagen Denmark pkaaip.dk Photos: Solar panels pages 3 and 29: /Ritzau/Hollandse Hoogte/Kees von de Veen Pages 21, 22, 30-31, 34, 36: /Ritzau/ Portraits on pages 3, 5, 13, 14, 19, 21, 32: Kristian Nyholm Graphic design by Rikke G. Design Studio Edited by Ditte Rosing-Schow, FRIDAY & Partners Printed by Dystan Rosenberg
PKA AIP 2016
Contents
CONTENTS EDITORIAL: Beating the benchmarks — 04
CHAPTER 1: About PKA AIP — 08 Purpose, impact and shared beliefs — 12
CHAPTER 2: Private funds — 16 Private funds portfolio on a strong trajectory — 18 Portfolio additions in 2016 — 20 Toward 2017 and beyond — 24
CHAPTER 3:
OUTRO
Direct infrastructure — 26
Looking back - and forward — 38
Taking stock of 2016 — 28 PKA AIP’s approach to infrastructure investments — 32 Outlook - Much more of the same — 36
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2016
Beating the benchmarks
BEATING THE BENCHMARKS A warm welcome to the 2016 annual report from PKA AIP. For us, the making of this report has been a time to take stock and reflect upon the year gone by, and to think about how we will prepare and plan for the future. That’s even more important this year, as we celebrate our 5th anniversary.
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PKA AIP
PKA AIP
Beating the benchmarks
2016
We are very pleased that our five-year net returns to the pension contributors have outperformed the relevant benchmarks by considerable margins. We fully recognize that results must be measured on a +10-year horizon. But after the first five years, we can point to the historically strong correlation between relative performance measured at the five-year mark and the relative performance measured at the 10-year mark or later. Our Private Funds program, consisting of predominately private equity buyout funds and co-investments with the same partners, has delivered a net return of 14.6%. This translates into a net outperformance of listed Managing Partner Anders Dalhoff
Five years ago, the Danish pension fund PKA
markets (alpha) by 2.9% points. You can read
made the strategic decision to separate alter-
more about the achievements of our Private
native investment activities in private equity
Funds team in Chapter 2.
and infrastructure from its main investment unit. PKA believed this would make it easier to
Our Direct Infrastructure program, consisting
benefit from advantages of scale, certainty of
of high-quality Northern European essential
assets, and the long-term investment horizon. Its
infrastructure, has delivered a net return
approach was to create an entirely new organi-
of 18.1%, which is well above any relevant
zation called PKA AIP, maximizing its ability to
benchmark that the returns can be measured
create a tailored service.
against. We discuss our Direct Infrastructure investments in Chapter 3.
I have the honor of being in charge of this organization. PKA AIP is made up of 20 indi-
It is no easy task to beat the benchmarks,
viduals who work relentlessly to provide better
because we compete with a great number of
risk-adjusted returns to PKA’s pensioners. We
highly skillful and professional market par-
manage a portfolio of approximately EUR 7.5
ticipants for attractive opportunities. We are
billion, and our annual investment ambition
proud of our results, but also very aware of the
is around EUR 1.3 billion.
work that lies ahead. We invest on behalf of pensioners from the Danish social service and
Based on a focused investment strategy, we at
healthcare sector. They rely on us, and we owe
PKA AIP have built a team to deliver on our
it to them to do a good job.
critical purpose of ensuring financial security in retirement for our Danish healthcare and social
We have stayed focused on the strategy that we
sector beneficiaries.
initially designed with PKA. We have built an
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2016
Beating the benchmarks
PKA AIP
2.9%
14.6%
Private funds 2012-2016
Outperformance of listed markets
Net return
Direct infrastructure 2012-2016
18.1% Net return
8.2 %
In comparison, listed European infrastructure has delivered 8.2% in the same period and infrastructure funds a median return of 10.4%
organization and an infrastructure that fits this
ence creating a leading consortia of like-minded
investment strategy and have done our best to
institutional investors. We see meaningful
stay disciplined in our execution. Within our
opportunities for such investors to work togeth-
two investment areas we have insisted - and
er more in the years ahead. Working together
will continue to insist - that teaming up with
means we can mutually benefit from compar-
proven Tier 1 partners is an essential prerequi-
ative advantages and we believe we can help
site to achieving our return targets while taking
others avoid disadvantages, such as significant
on as little risk as possible.
asymmetry in information and lack of resources that tend to challenge a number of institutional
We do not work with specific geographic or
investors when they work on their own within
thematic allocations that force us to fill gaps. We
alternative investments. In short, there are clear
take a clear stand on what we can do ourselves,
scale advantages to be reaped for those who are
and what we should procure in the marketplace.
prepared to engage.
We only invest where there is the prospect of an appropriate risk-adjusted return.
Last and not least, we thank our sponsors at the PKA pension funds for a very successful 2016
Our expectations for 2017 are very much a con-
and for their strong commitment to the PKA
tinuation of the past years. We will continue to
AIP organization.
work hard to be a preferred financial partner in situations that fit our strategy and capabilities, with well-known partners as well as new partners, on both the vendor and investor side. Over the years we have gained considerable experi-
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Anders Dalhoff Anders Dalhoff
Managing Partner
PKA AIP
Beating the benchmarks
2016
“We invest on behalf of pensioners from the Danish social service and healthcare sector. They rely on us, and we owe it to them to do a good job.�
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Chapter
01 PKA AIP
ABOUT PKA AIP
Five years ago, the Danish pension fund PKA made the strategic decision to separate alternative investment activities in private equity and infrastructure from its main investment unit. This led to the founding of PKA AIP.
The year in review
PKA AIP 2016
THE YEAR IN REVIEW 2016 has been a very successful year for PKA AIP. Our total commitments have never been bigger. We currently manage a portfolio of approximately EUR 7.5 billion, and our annual investment ambition is around EUR 1.3 billion. Below we present a few highlights from the year gone by. Direct Infrastructure
Private funds Offshore wind farm Burbo Bank Extension closed in February 2016. PKA owns the project with DONG Energy and KIRKBI
258 MW
300 funds
Screened in 2016
2
1
New investments in 2016
Exit in 2016
5 Steffen Risager, joined the team as Senior Associate, May 2016
208 Opportunities reviewed
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Co-investments in 2016
PKA AIP 2016
The year in review
171
Offshore wind farm Butendiek sale signed in December 2016, USD 220 million in returns over a 4-year-period
Meetings with potential managers in 2016
Fund commitments in 2016
288 MW
4 8
560 Million
Full due diligences
299
EUR committed
EUR committed
496
Kasper Hansen joined the team as Partner and Head of Direct Infrastructure, March 2016
MW
Biomass power plant Tees Renewable Plan deal closed in July 2016, plant will be operational in 2020
Lasse Helstrup joined the team as Investment Manager, May 2016
Million
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Purpose, impact and shared beliefs
PKA AIP 2016
PURPOSE, IMPACT AND SHARED BELIEFS Two people in a small office in the PKA building. This is how it all began for PKA AIP in 2012. Back then, PKA already had more than 80 fund commitments in its portfolio and a plan to work with alternative investments on a different and much more ambitious scale.
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PKA AIP 2016
Purpose, impact and shared beliefs
Private funds team
The goal was to create an ambitious and independent alternative investment branch to the benefit of PKA’s pension recipients. PKA AIP has come a long way since then. The growth ambition for PKA AIP has been articulated from the outset and supported by systems and processes that were perhaps overly ambitious in the beginning. Managing partner Anders Dalhoff says: “We have steadily built an organization of 20 individuals,
“Who we invite to take part in our journey is among the most important decisions we make.”
and we expect more talented people to join us in 2017. Our early and significant investment in internal infrastructure has
be done refining our people proposition, but I believe we
allowed us to scale up efficiently and effectively.”
have proven that the three pillars that support our ambition are working for us,” he says.
PKA AIP has established two hard-working teams, one focused on private funds and one focused on direct infrastructure
The first pillar is about articulating a strong sense of purpose.
investments. And while Anders Dalhoff admits it sounds a bit
“We are here to support the creation of a strong financial
like a cliché, he still believes it to be true in PKA AIP as well
foundation for the retirement life of current and future pen-
as in any other business: “Who we invite to take part in our
sion recipients, and we do it by delivering the best possible
journey is among the most important decisions we make. Their
risk-weighted returns,” Anders Dalhoff says. The firm recogniz-
knowledge, their commitment and their sense of judgment are
es that to most people work life is about more than a paycheck.
really what matters.”
“Our mission offers a clear and important purpose to those joining us. And they also get to be part of building a company,”
Being able to attract the right people is crucial, and Anders
Anders Dalhoff notes. “In all modesty, I believe we are setting
Dalhoff feels privileged by the quality and the capabilities of
new standards for alternative investments on behalf of institu-
the people who have chosen to join PKA AIP. “We will never
tional investors in Scandinavia.”
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Purpose, impact and shared beliefs
PKA AIP 2016
Direct infrastructure team
The second pillar is about the impact of work. PKA AIP man-
possible recommendations and decisions. “A lot of what we do
ages one of Europe’s largest alternative investment programs
is about avoiding mistakes,” says Kasper Hansen, partner and
with EUR 7.5 billion under management and EUR 1.3 billion
Head of Infrastructure. “It may sound simple, but it is difficult
to invest per year. “Our contribution will make a real differ-
in practice. We live in a world with a lot of opportunity and
ence to more than a quarter of a million pension payers,”
complexity where resources are limited. If you do not have the
Anders Dalhoff says.
mind-set that avoiding mistakes is key, you will not thrive in our team,” Kasper Hansen adds.
“It may sound simple, but it is difficult in practice. We live in a world with a lot of opportunity and complexity where resources are limited.”
A set of guidelines is painted on the wall in PKA AIP’s offices situated in central Copenhagen. Anders Dalhoff believes they are best suited as an internal moral compass, so we won’t reproduce them here. But among, the recurring words are responsibility, integrity, loyalty and reason. “As the teams continue the work to fulfill our aspiration to be a Tier 1 Nordic alternative investment partner, we will continue to hold ourselves to the same high standards we demand from our external partners,” he says. “We’re here to make sure that the pensioners get an attractive return. That’s really it.”
The third pillar is a set of shared core beliefs. PKA AIP has defined a set of ground rules that essentially allow everyone to develop and make a difference, regardless of their title or position. The purpose is to challenge everyone to arrive at the best
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PKA AIP 2016
Purpose, impact and shared beliefs
“We are setting new standards for alternative investments on behalf of institutional investors in Scandinavia.�
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Chapter
02 PKA AIP
PRIVATE FUNDS PKA AIP manages a portfolio of 124 funds and 18 co-investments with a total exposure of EUR 6 billion.
Private funds
PKA AIP 2016
PRIVATE FUNDS PORTFOLIO ON A STRONG TRAJECTORY 1.3x Net TVPI:
14.6% Net IRR
2.9% Direct Alpha
As we turned the page on 2016, our first investment pro-
14.6% net IRR at the end of 2016. Without currency effects,
gram, PKA AIP 1, had been running for five years. It has
the total net return is 9.4%.
been two years since the last investment was made within its mandate – a co-investment in SSI, the worldwide
Relative to the listed markets the portfolio has also performed
leader in survey sampling and data collection solutions.
strongly, already creating a Direct Alpha of 2.9% against MSCI
We now are well into the commitment period of PKA AIP
World. “The underlying portfolio companies continue to
2 Private Funds, the 2015-2017 investment mandate of
mature, and exits have begun to take place. As fees move from
EUR 1.7 billion. At the end of 2016, EUR 1 billion had been
committed to invested capital, we expect the strong year-on-
committed to a total of eight funds and 10 co-investments
year return to continue in 2017, increasing the overall IRR of
in PKA AIP 2. In total EUR 2.5 billion has been committed
the programs,” Brian Nordlund explains. “In addition, the large
across the two programs.
share of co-investments will help mitigate the J-curve effect as we continue to add new commitments to the portfolio.”
In our line of business, looking at annual returns of a single year is not a precise indicator of performance. Yet now that
The current results have given the team a boost of confi-
the portfolio has begun to reach a level of maturity, it seems
dence. Managing Partner Anders Dalhoff explains that “Back
fair to make an initial assessment of performance. It is
in 2012, when we began to invest our first mandate from
one that our private funds team can be quite proud of. The
PKA, we set out with an ambition to deliver results on par
portfolio is on the rising part of the so-called J-curve, which
with high caliber fund selection teams, but with a lower cost
illustrates the tendency of fund commitments to deliver nega-
base. Achieving our ambition is a long journey, and we have
tive returns and cash flows in the early years and investment
only taken the first steps; nonetheless, given the strong trac-
gains later. Despite this effect, the portfolio is tracking at
tion, I feel certain that we are on the right track.”
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PKA AIP 2016
Private funds
The outlook for PKA AIP 2, the 2015-2017 investment mandate
“We feel certain that we are on track to deliver results that will outperform benchmarks.”
of EUR 1.7 billion, is promising as well based on its initial performance. At the end of 2016, EUR 1 billion had been committed to a total of eight funds and ten co-investments. Due to the large share of co-investments, the program has not displayed the traditional J-curve effect, but has reported positive IRRs throughout its lifetime. With one year left to make new commitments, it is still early to draw any firm conclusions, but Anders Dalhoff is optimistic. “With PKA AIP 2 off to a flying start, we have a strong foundation for future performance, and I expect that this program will also deliver strong results for the benefit of pension savers. I’m quite proud of what the team has achieved.”
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Portfolio additions in 2016
PKA AIP 2016
2016 ADDITIONS TO THE PKA AIP PORTFOLIO During 2016, the private funds team advised PKA on a total of four fund commitments and five co-investments totaling EUR 520 million. Our Senior Investment Manager, Nishandan
In the infrastructure space, the team committed
Ganesalingam, has chosen to highlight three
EUR 75 million to Antin Infrastructure Partners
of these new commitments to illustrate what
III. According to Nishandan Ganesalingam, An-
we are looking for. Nishandan Ganesalingam
tin provides access to infrastructure investments
led the underwriting of a USD 75 million
that complement the type of infrastructure
commitment to Washington-based Arlington
investment pursued by the Direct Infrastruc-
Capital Partners IV, the only new manager
ture team in PKA AIP on behalf of PKA. “Antin
who joined the portfolio in 2016. “We believe
has a solid ability to identify opportunities
that we have committed to four very strong
that combine the stability of more traditional
managers this year. Arlington Capital Partner
infrastructure investments with high growth po-
is a great example of our ideal manager,” he
tential. This has allowed them to achieve private
says. “The manager has deep expertise and
equity-like returns,” he says.
domain knowledge within government ser-
Page 20
vices and regulated industries, which allows
Another re-up was the USD 125 million commit-
it to accurately assess risks and add value to
ment to HGGC III, the second commitment to
their investments. And importantly, the team
the mid-market private equity fund managed
has been around long enough to document its
by HGGC. Based in San Francisco, HGGC invests
ability to create value.”
across a range of industry sectors, including tech
PKA AIP 2016
Portfolio additions in 2016
15% of the portfolio companies are within healthcare Senior Investment Manager, Nishandan Ganesalingam The portfolio includes a large number of IT and software related companies, including Netsmart and Accruent
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Portfolio additions in 2016
PKA AIP 2016
and tech-enabled services, business services,
establish Netsmart as the largest provider
financial services, consumer and industrials.
of software and technology solutions for the home health services sector. Another note-
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Of the five co-investments made in 2016,
worthy co-investment was the acquisition of
Nishandan Ganesalingam highlights the USD
Grandi Stazioni Retail together with Antin
26 million commitment to Netsmart Technol-
Infrastructure Partners II to which EUR 45
ogies together with GI Partners IV. As part
million was committed. Grandi Stazioni Retail
of the transaction, Netsmart merged with
operates the long-term concessions providing
Allscripts’ homecare software business to
exclusive rights to the commercial leasing and
PKA AIP 2016
Portfolio additions in 2016
INVESTMENTS IN 2016:
FPX Investment by HGGC III made in April 2016 FPX delivers a cloud-based platform that optimizes and automates quoteto-order business processes, enabling large global companies to sell complex products and services with speed, efficiency and precision across multiple channels
ORAZUL Investment by I Squared Capital in October 2016 The company operates 2,300 megawatts of hydro and thermal generation and 730 kilometers of 220kV transmission lines and natural gas processing facilities. It is one of the largest privately-owned electricity generation companies in Latin America
Accent food service The private funds portfolio includes a high number of industrial niche companies with technical know-how within a very specific area
advertising spaces of the 14 largest Italian railway stations. Grandi Stazioni Retail was the third co-investment done together with Antin Infrastructure Partners. Across the portfolio of funds committed by PKA AIP, approximately 70 portfolio compa-
Investment by Audax Private Equity V made in December 2016 Accent Food Services is a leading provider of customized fresh food, snacks, and refreshment services to businesses, educational institutions, and property management companies
nies were acquired during 2016, adding to a portfolio of more than 900 companies in total.
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Toward 2017 and beyond
PKA AIP 2016
“With a few re-ups expected for 2017 and about EUR 150 million reserved for co-investments, we are on track to add 3-4 new managers to the portfolio in 2017.”
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PKA AIP 2016
Toward 2017 and beyond
TOWARD 2017 AND BEYOND 2017 constitutes the final investment year for the PKA
repeatedly deployed operational and strategic skills,” Brian
AIP 2 program, and with EUR 1 billion of the EUR 1.7
Nordlund adds.
billion already committed, the team will look to deploy approximately EUR 700 million in new commitments in
As has been the case until today, most of the commitments
2017 to private equity predominantly.
for 2017 are expected to be with managers in North America and Europe. Nonetheless, significant time and resources
WHAT WE LOOK FOR:
network and a pipeline of potential managers in other parts of the world as well. That means PKA AIP commitments to
Asset classes:
Private Equity
Fund size:
USD 500 million-2 billion
Strategy and value creation:
Buyout and control investments
Managers type:
have over the past few years been invested in building a
regions like Asia could take up a larger share of the program going forward. Co-investments will also continue to play a significant role in 2017. PKA AIP 2 set out with an ambition to commit at
Operational and strategic value creation
least 20% of its funds to co-investments. While PKA AIP 2
Clearly articulated and repeatable levers
emphasizes that efforts to increase the co-investment share
Independent and single strategy managers
is tracking comfortably above this level, Brian Nordlund continues, as it is a key lever to solid net returns because it brings down the average fees and expenses of the program. Looking beyond 2017, the team already has the playbook for 2018 in place and the 2019 version is also taking form.
Brian Nordlund, Partner and Head of Private Funds outlines
“We know which managers we would like to focus on in the
the ambition for 2017: “With a few re-ups expected for 2017
coming years,” says Managing Partner Anders Dalhoff, “and
and about EUR 150 million reserved for co-investments,
although it never plays out exactly as planned, we are in a
we are on track to add 3-4 new managers to the portfolio
very good position to prioritize our efforts around the best
in 2017.” Fund commitments are typically between USD 75
in class buyout managers.”
and 125 million. When asked what the team will be looking for in 2017, the answer is simply “more of the same.” Since the early days of the program, the strategy has been to pursue mid-market managers with a control mind-set. “Strong performance can be based on different strategies and approaches. We look for the managers who have a clear approach to the value creation – through a narrow sector focus, a particular model and/or situations – and who have
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Chapter
03 PKA AIP
DIRECT INFRASTRUCTURE For our infrastructure team, 2016 has been a remarkable year. It offered extraordinarily strong results with a net IRR of more than 20%, well above our hold-to-life expectations for the asset class.
Taking stock
PKA AIP 2016
TAKING STOCK OF 2016 Achievements to date
1.5
22%
billion EUR assets under mangement
6
realized net return from the sale of Butendiek Offshore Wind Farm
investments within renewables made to date
2.5 10
million households supported by the clean energy created by our investments
professionals in the team, up from 5 at year-end 2015
For our infrastructure team, 2016 has been a remarkable
transaction was signed in December 2016, just shy of four
year. It offered extraordinarily strong results with a net
years after PKA AIP originally advised PKA on its investment
IRR of more than 20%, well above our hold-to-life ex-
in Butendiek, at the time a high-quality shovel-ready project
pectations for the asset class. These returns have been
from German developer WPD.
achieved while applying a conservative leverage of less than 25% across the portfolio.
“Although we invest to hold for life, the flexibility we can offer PKA and other investors allows them to exit assets
PKA and like-minded pension funds can be the ideal owners
from time to time, as this sale shows.” The realization of this
of infrastructure assets due to their long-term focus, sub-
minority stake also demonstrates the potential for liquidity
stantial funds and flexibility regarding structure, leverage
from investments into attractive infrastructure assets.
and cash yield. As investors, we are in it for the long run to create long-term steady returns. We are not looking to sell the assets at any fixed point in time. As an exception to this rule, the strong 2016 results were in part driven by the realization of the first direct infrastructure investment since establishing PKA AIP. Kasper Hansen, partner and Head of the Direct Infrastructure team explains: “On the basis of substantial, unsolicited interest, we advised PKA on the sale of its stake in German 288MW offshore wind farm Butendiek. The EUR 100 million investment delivered
“Our task is to create the best possible returns to the benefit of PKA’s pensioners, and I believe our team did a really good job delivering on this mission.”
well above EUR 200 million in cash return, generating an IRR of more than 20%. Our task is to create the best possible
During 2016, PKA AIP advised PKA on investments in two UK
returns for the benefit of PKA’s pensioners, and I believe our
CfD projects, alongside high quality partners. In February
team did a really good job delivering on this mission.” The
it advised PKA on an investment in Burbo Bank Extension,
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PKA AIP 2016
Taking stock
a 258 MW offshore wind farm off the coast of Liverpool.
among the largest of its kind in the world. Kasper Hansen
PKA now owns this asset in partnership with KIRKBI and
comments: “It is the first time that PKA AIP has teamed
long-term PKA AIP partner DONG Energy, which developed,
up with Macquarie Capital. I think it goes to show that
constructed, and now operates the wind farm.
the unique combination of a long-term investment focus,
In August 2016, our first biomass power plant investment
partnership model and our team’s ability to execute on even
was completed. After an extended period of exclusivity with
highly complex transactions on an compressed timeline de-
one of the world’s largest infrastructure investors, Mac-
livers real value to projects and investing partners. I expect
quarie Capital, PKA became 50% owner in Tees Renewable
that we will engage in similar processes with additional Tier
Energy Plant, a 299 MW biomass power plant in Northern
1 partners as we continue to look for attractive long-term
England that will be operational in 2020. The project is
investment opportunities.”
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Taking stock
“Although we invest to hold for life, the flexibility we can offer PKA and other investors allows them to exit assets from time to time, as this sale shows.� Page 30
PKA AIP 2016
PKA AIP 2016
Taking stock
KEY FIGURES DIRECT INFRASTRUCTURE 2012-16 - 18.1% portfolio net IRR return across six assets - 22% realized IRR from the sale of Butendiek Offshore Wind Farm - MSCI Infrastructure Europe delivered 6% IRR gross return in the same period with higher leverage levels while infrastructure funds delivered 10.4% IRR in median net returns
In total, PKA AIP invested more than EUR 600 million in these two assets, which will offer CfD-backed stable cash flows to PKA and its pensioners for 15 years each once in operation. This achievement surpassed Manging Partner Anders Dalhoff’s expectations. “In 2016, we successfully executed on highly attractive opportunities to deploy a substantial amount of PKA capital in stable long-term assets. There will be volatility in the annual investment volumes in years to come, but as the 2016 result shows, we now have the team, the track record, the pipeline and the backing to increase our annual investment volume from the previous EUR 300-400 million to EUR 500-600 million going forward. As was the case in 2016, the expectation for the future is that we will be able to offer considerable syndication to investment partners in one or more assets,” Anders Dalhoff concludes. Another two substantial milestones were reached during the year when two projects in the portfolio completed construction. The 252 MW offshore wind farm Gode Wind II in Germany and the 600 MW offshore wind farm Gemini in Holland are now both in operation, resulting in a significant uptick in value, as they are largely de-risked. These projects are good examples of why infrastructure assets can provide a stable, long-term, and predictable return. “We are pleased to see that five years into our engagement with PKA, we are benefitting from a disciplined execution of the strategy,” says Anders Dalhoff emphasizing that PKA AIP has built a strong and resilient platform. “We always have the long term in mind – when it comes to our investments, and when it comes to building our company. I am confident that the portfolio we have will perform well even through difficult times.”
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PKA AIP´s approach
PKA AIP 2016
PKA AIP’S APPROACH TO INFRASTRUCTURE INVESTMENTS In a challenging investment environment with bond yields close to zero, unpredictable volatility on listed markets, and few believing that interest rates are going to rise any time soon, infrastructure assets are becoming of increasing interest to pension funds and others with long-term capital to invest.
Head of the Infrastructure Team Kasper Hansen
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PKA AIP 2016
PKA AIP´s approach
PARTNERING WITH PKA AIP
potential, but rather to minimize downside risk through a prudent and cautious approach to market risks (such as long term power prices),
- Dedicated, long-term and competitive source of capital from pension funds with EUR 35 billion of AuM - Experienced team with highly efficient investment and decision processes - All equity-financed transactions, with flexibility to use moderate leverage enabling swift processes, simpler structures and increased deal certainty - High degree of flexibility in terms of tailoring the structure to the needs of the investment and partners
while applying no or low leverage and entering into long term contracts with strong partners in stable political and regulatory regimes,” Ulrik Pallisø Bornø explains. “The investments we have made are all based on a long and meticulous due diligence process,” Ulrik Pallisø Bornø emphasizes. “And in comparison with many other infrastructure investors, we are unique in that we take a buy
- Proven partnership model with Tier 1 strategic partners, readily repeatable across several assets and sectors
and hold approach for the life of the asset,
- No requirement for fixed cash yield, with an ability to invest through lon construction phases
stakes - and do not require leverage or a fixed,
invest substantial sums - often in minority periodic cash yield. Investing with this degree of flexibility enables us as a financial investor to back the best partners to deliver projects
Kasper Hansen, Partner and Head of the In-
through a potentially long construction phase.
frastructure Team, lets us in on what PKA AIP
That helps us unlock situations and create
is looking for. “PKA AIP’s infrastructure team
value for projects and partners alike, with
has clear criteria for how we invest the funds
the backing of a leading Nordic labor market
with which we have been entrusted,” Kasper
pension fund with a balance sheet in excess of
Hansen says. “We want to invest directly into
EUR 35 billion.”
infrastructure assets that provide essential services to society.” Essential infrastructure as
In other words, PKA AIP offers a partnership
defined by PKA AIP comes with four fundamen-
with a financially highly solid institution,
tal characteristics: First, the assets are situated
while having a long investment horizon that
in markets that are regulated and politically
can match the lifetime of any asset in the
stable. Second, the demand for the services or
market. “We’re not looking to exit within any
product that the asset delivers is constant and
particular time frame. Pressure to exit can lead
non-substitutable. Third, the investments are
to suboptimal outcomes and often just adds
capital intensive, long term and stable in value.
extra costs reducing the life-time value of the
Finally, the investment should provide cash
asset,” Kasper Hansen explains. “Also, in some
flows that are largely availability dependent
cases, we can offer a full financing solution to
and highly predictable.
vendors well ahead of construction pursuant to certain milestones being achieved. Having a
Having identified good, stable infrastructure
team that is able to deliver on this proposition
assets, the key is to ensure we engage with the
with dedicated institutional investor backing is
best partner for that asset type and create a
quite exceptional in our business,” he adds.
structure with a strong degree of alignment and appropriate allocation of risk. “Since our incep-
The performance of PKA AIP’s infrastructure
tion, the philosophy has been to avoid mistakes
investments is evaluated differently from what
by seeking to only take on risks we can prop-
is generally seen based on two dimensions: First,
erly assess and ultimately are the right owner
PKA AIP’s infrastructure investments are meas-
of,” says Investment Director Ulrik Pallisø
ured against an unlevered hurdle (if no leverage
Bornø. “We do not seek to maximize the upside
is applied). “This enables us to pursue situations
Page 33
PKA AIP´s approach
The infrastructure targets have four fundamental characteristics: First, they are situated in politically stable markets. Second, the demand is constant and non-substitutable. Third, the investments are capital intensive, long term and stable in value. Finally, the investment should provide predictable cash flows.
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PKA AIP 2016
where most infrastructure funds cannot engage
Overall, Managing Partner Anders Dalhoff
without considerable amounts of leverage,
believes that the approach of the infrastructure
which can introduce additional risk detrimen-
team has delivered proof of concept. “The
tal to the very purpose of the infrastructure
results from the first five years show that our
investors, and may not be desirable for the
model works. Increasingly, people come to us
vendor or partner,” Kasper Hansen explains.
with potential opportunities, because they can
Second, the investments are measured against
see that we deliver on our promise and are able
a hurdle that is set based on the relevant local
to work through complex situations to find the
10-year government bond yield plus a premium
best structure for all parties. Ultimately, we’re
at the time of investment. “As such, we do not
here to secure attractive and stable returns
pursue a fixed return hurdle across all asset
for PKA’s pensioners. It is a great satisfaction
types,” Kasper Hansen says. “Rather we look at
to the team, and to me personally, that we are
the return providing the appropriate reward
delivering on this promise. This is really why
for the risk undertaken at the relevant time.”
we do it!”
PKA AIP 2016
PKA AIP´s approach
“We want to invest directly into infrastructure assets that provide essential services to society.”
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Outlook
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PKA AIP 2016
PKA AIP 2016
Outlook
OUTLOOK — MUCH MORE OF THE SAME As PKA AIP continues to pursue investments in essential infrastructure assets on behalf of PKA and potentially other institutional investors, the plan is to remain true to the core task. That means procuring stable returns to investors from assets
INVESTMENT CRITERIA PKA AIP has defined six criteria for their infrastructure investments
with low correlation to other asset classes, in partnership
1. Alignment: Structures that ensure real alignment with Tier 1 strategic partners
models with Tier 1 strategic players. And even though this
2. Geography: Northern & Western Europe
may sound like ‘just more of the same’, Kasper Hansen, Partner and Head of Infrastructure has ambitious plans: “We expect to complete two to three transactions per year in the coming years, investing more than EUR 500 million annually. This means we have to continue developing our
3. Sector: Agnostic within essential economic infrastructure 4. Ticket size: up to EUR 400 million potential ticket in equity or mezzanine
group of partners we look to back and to invest alongside.
5. Duration: Hold-to-life intention with more than 15 years remaining asset life
“In addition PKA AIP, which now has a team of 10 people
6. Stage: Construction-ready or operational assets
team and network of trusted advisors, while expanding the
dedicated to direct infrastructure investments, is looking to broaden the scope of relevant infrastructure investments more broadly within energy or transport related assets.
al investors to participate in infrastructure investments,” he
We’re currently pursuing several interesting targets across
adds. “For us, that means there is an illiquidity premium to be
Northern Europe, but it is too early to tell which of the
reaped. And with our experienced team, we think we can offer
opportunities will be added to our portfolio in 2017,”
mitigation by selecting the right assets, allocating risk appro-
Kasper Hansen explains.
priately and creating the right structures.”
While the future looks bright, there are of course potential
“Our model allows institutional investors to truly benefit from
pitfalls on the journey ahead. “The benefits sought in these
scale, certainty of assets and long horizon, three characteristics
assets are well-understood, but so are the potential drawbacks
that make such investors attractive partners in infrastructure
that need to be managed carefully,” Managing Partner Anders
assets,” Anders Dalhoff adds. “Over the years we have gained
Dalhoff says, referring to the illiquidity penalty that investors
considerable experience creating and leading consortia of
risk incurring if forced to leave assets in an untimely manner,
like-minded institutional investors and we think there is a
often below fair market value. “This illiquidity penalty consti-
solid rationale for investors to work more closely together
tutes a significant limitation on the ability of many institution-
in the future using our platform,” Anders Dalhoff concludes.
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Looking back - and forward
PKA AIP 2016
LOOKING BACK — AND FORWARD Thank you for reading the annual report 2016 of PKA AIP. It has been a great year for us. We are proud of the results we have achieved, to the benefit of the pensioners from the Danish social service and healthcare sector. On our five-year anniversary, we can truly say that we have proof of concept, delivering double digit results for our two asset classes. We have built a platform of unique knowledge and experience that we will expand in 2017 – taking onboard new team members, looking at a broader range of assets within infrastructure, and perhaps advising pension funds other than PKA if the right partner comes our way.
Whatever may be in store for us, we look forward to building our team and our company in the years ahead. Anders Dalhoff Managing Partner
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