Denmark’s Pædagogernes Pension (PBU), the pension fund for teachers, has been reprimanded by the Danish Financial Supervisory Authority (Danish FSA) over the risks it has taken in relation to private equity investments.

In a statement, the Danish FSA said that in February 2022 it inspected the pension fund’s private equity investments, with a focus on the fund’s organisation and resources, investment strategy, investment processes and ongoing valuation for private equity investments.

As part of the inspection, the Danish FSA reviewed three selected private equity investments. PBU had private equity investments of DKK 1.8bn at the end of 2021, corresponding to 1.7 per cent of the company's total investment assets.

The company's private equity portfolio consists of a larger exposure to one fund, a number of vintage funds in the run-off and a few new, smaller impact funds.

“The Danish FSA found that there were deficiencies in the preparation of the return/risk ratio for the individual fund investments, as the company did not take sufficient account of the underlying risks in the investment funds in the calculated risk premiums. The Danish FSA has therefore instructed PBU to ensure that specific and relevant risks are included in the measurement of risks and assessment of the return/risk ratio,” the regulator noted.

In addition, it also found deficiencies in the company's business procedures in relation to private equity. For example, it found that PBU had not set requirements and secured the necessary documentation for activities around the ongoing monitoring and assessment of the private equity portfolio's performance, including requirements for the fund managers' periodic reports and performance statements, as well as more detailed requirements for obtaining information about the funds' underlying portfolio companies in the ongoing dialogue with fund managers.

The Danish FSA has therefore ordered PBU to ensure sufficient documentation and clarity about the requirements and tasks that apply in relation to entering into and ongoing monitoring of private equity investments.

In regard to ongoing valuation, the regulator found that PBU did not use relevant market data for the ongoing valuation of private equity between quarterly statements. PBU has therefore been ordered to ensure that the ongoing valuation of private equity investments takes place on the basis of processes and methods that ensure valuation based on relevant market data.

“The Danish FSA found that there were also deficiencies in the company's methods and processes for valuing private equity investments, as the company did not carry out a sufficient check of the fund managers' valuation by means of random checks or the like, including that it used the database and assumptions used in the fund managers' valuation models, are reliable and relevant. The Danish FSA has ordered PBU to establish methods and processes that ensure sufficient ongoing control of the fund managers' valuation,” it stated.

In response, PBU CIO, Carsten Warren Petersen, said: "PBU's share of private equity investments amounts to approx. 1.7 per cent of the total assets. We have had a good discussion with the Danish FSA and are already in the process of implementing the orders. The orders concerned requirements in relation to our supervision of PE funds and underlying investments (improved documentation). The FSA also issued orders in relation to our valuation of the underlying investments in PE funds (valuation based on relevant market prices)."

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