After reviewing the from Norges Bank Investment Management on the performance of private equity funds on 4 June 2024, Delano approached the Fonds de Compensation (FDC), Luxembourg’s main public pension fund, for an overview of its current private investments and whether it intends to enlarge its portfolio into additional alternative assets.
Background
The Fonds de Compensation (FDC), a heavyweight in Luxembourg with €25bn in assets under management, is entrusted to “manage the compensation reserve of the general pension insurance scheme and to achieve an effective return while diversifying risks,” according to its .
“Since 1985, contributions to the pension system have been higher than the pension benefits. The excess amount has been accumulated into a compensation reserved administered by the FDC since 2004 and invested in capital markets,” Christian Würth, advisor and head of collective investment undertaking, told Delano in an interview.
High investment flexibility but with strict guardrails
As for many pension funds, the FDC is confronted with a specific context, with significant flexibility in the investment universe, but administrative circumstances that effectively limit the reach of its possibilities. Würth underlined that the strategy of the FDC is authorised by the board of directors and is submitted to the minister for social security for an approval.
None of the asset management operations are performed inhouse. As a public entity, the FDC is required to assign mandates to outside asset management firms by public tenders for a maximum period of 10 years. The same manager could be selected again--or not--upon winning a new public tender. Therefore, it is not guaranteed that it will maintain its mandate.
Traditional asset management with some private assets
Marc Fries, first advisor and head of economic department, explained during the online interview that the FDC has a “plain vanilla” strategy focusing on traditional listed investments. “Private equity investment is not part of our strategy because it is a complicated… and expensive asset class with required investments that are going beyond 10 years,” a feature that does not comply with the maximum duration of its mandates.
No pressure to invest in private equity
Würth commented that the FDC has allocated some assets into global real estate funds (6.51% as of YE2023) and intends to invest in an infrastructure fund to further enhance diversification, but also to exhibit sustainable responsibility as the investments will focus on renewable energy and “other sustainable assets.”
Private equity investments are not on the drawing board
“As per our mission, it is not our role to leap into asset classes that are more risky and complex such as private equity or private debt,” stated Würth. He explained that he is entrusted to manage the compensation reserve as a duly responsible person. In addition, he considers that assessing the return of these investments “is more complicated [than traditional assets].”
More generally, Würth thinks that the value added by investing into private equity over the additional cost and efforts is “unfavourable.” Moreover, he thinks that FDC’s strategy, reviewed every five years, will unlikely change in the future.
Fries commented that he met once or twice with the to discuss investment mechanics. He feels “no pressure to invest in private equity.” As several members of the executive board don’t come from the “banking sector,” he thinks that there is a need to ensure a proper understanding of the strategies and investments that require their approval.
Could the recent weak performance of PE and VC be an investment opportunity?
It worth noting that the recent has not changed the view of the FDC as a timely investment opportunity. Concurrently, Würth noted that the infrastructure market offers a good entry point given the lower valuation.
Questioned about the possibility to invest in listed companies themselves investing in private equity, Würth commented that the FDC is not involved in the day-to-day activities of its equity mandates apart from imposing an exclusion list on fund managers.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .