Danish Pensions Funds' Allocation to Alternative Assets

Alexander Juel Baungaard & Niclas Milvertz

Student thesis: Master thesis


This study investigates the performance and returns of alternative assets, in particular, private equity within the buyout, venture capital and real estate sphere from 1982 to 2014. Further, it takes the perspective of a Danish pension fund to determine whether a higher allocation to these alternative assets is justifiable. First, the study shows that institutional investors can indeed use the commonly applied IRR and TVPI as a supplement to their portfolio allocation decisions as these measures are highly correlated with the relative performance measure KS-PME. Second, it is shown based on KS-PME that private equity has outperformed the MSCI World index overall, despite buyout being the only consistently overperforming fund type. Against expectations, European funds have on average performed better than American funds which, in turn, have performed better than funds from other continents. An interesting observation from the view of Danish pension funds is that Nordic funds seem to perform in line with their global peers. A significant overperformance is found for GPs who are on their third consecutive fund or later, whilst an overall inverse relation is uncovered between fund size and performance. This is particularly strong for real estate funds. Venture capital and real estate funds see eroded returns during recession periods, as opposed to buyout funds that on average maintain an overperformance. It is further shown that these usually extend their investment horizon in recession periods, which is offset by an increase in multiple compared to boom periods. Despite several significant results, a mere 17% of the variation in performance can be explained by the above parameters. From a Danish investor perspective, the main obstacles from investing in alternatives have been identified as ambiguous regulation, determination of illiquidity and leverage premia, search and monitoring costs, fee management, restriction of ticket sizes and first mover risk. Based on input from key persons in the industry, the study provides advice on how to handle and overcome these. Ultimately, upon weighing the overperformance and diversification with the obstacles, the study concludes that there are no particularly sound reasons, as to why the Danish pension funds should have a lower allocation to alternatives than the global average. In fact, due to their size, expertise and current allocation, Danish pension funds as a whole seem well-positioned towards the alternative asset class.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages196