ABP supports innovation with incubator investment

Over the next few years the €180 billion ABP will invest 2 per cent of capital to innovative assets and strategies under the broad direction of innovation. One such investment has been an allocation to the incubator company, IMQubator, which invests in investment managers with innovative ideas and strategies. Amanda White spoke with chief investment officer of IMQubator, Rikard Lundgren, about supporting managers in the search for alpha and how pension funds can benefit.

The Dutch have long been recognised for their high-quality pension fund management. Now IMQubator, the independently-owned enterprise which has investment backing from the country’s largest pension fund, the giant ABP, is aiming to take that innovation further by attracting skilful, entrepreneurial managers to the Netherlands and providing capital and support for their business.

The business model, which provides capital in return for a stake in the company and reduced management fees, is built on a belief that alpha lies in the individual entrepreneurial manager, and that can be accessed for investors if given the right framework for fruition.

According to Rikard Lundgren, chief investment officer of IMQubator, what started as a conversation driven by the Holland Financial Centre, whose mandate is to develop the country as a financial centre, about how to grow innovation in the large institutional sector has now grown into the establishment of an independent company to specifically cater for pension funds to concentrate on investing in new, innovative managers.

While a number of other pension funds had made verbal commitments, ABP is the only fund at this stage to invest, with an initial commitment of €250 million ($367 million).

In the past few years ABP has changed the way it views asset class definitions and has divided its portfolio into two components. One is the liability hedging portfolio which uses assets and strategies that have low volatility in relation to liabilities and the other is the risk optimising portfolio which involves riskier assets and aims to gain the highest possible returns. In this way it doesn’t look at investments in terms of alpha and beta.

The main criteria for new ideas include improving either the liability hedging portfolio or the risk optimising strategy, being a sustainable driver of returns, for it to be potentially scalable, and not threaten reputation or headline risk.

As part of ABP’s 2007-2009 strategic plan the focus on innovative diversification was increased by reserving 2 per cent of the portfolio for new innovative assets and strategies. Introduced when Rod Munsters was chief investment officer, an innovation committee was established to support these ideas and investments both internally and externally. Global tactical asset allocation team members are the most frequent contributors to the committee, as innovative ideas are inherent in its nature working across asset categories.

Some of the investments made in ABP’s innovation category include a New Zealand Forestry fund, and Imagem Music Group a music publishing investment fund of ABP, which recently purchased the music of Rodgers & Hammerstein.

The investment in IMQubator also fits into this innovation bucket.

While the firm came out of an idea generated in part by the Holland Financial Centre, IMQubator is completely independently owned by three directors, Lundgren the last to join in May of this year. At that time the company had more than 150 potential deals on the table, the majority of which were investment managers approaching them.

The purpose of the business is to provide a framework to allow pension funds to invest in new managers which will be housed within the IMQubator building, using its infrastructure and support, oversight and risk management framework.

At the moment Lundgren says the business is assessing about 170 managers, of mixed style, skill and interest from complex quantitative models to a simple asset class strategy to infrastructure.

“We have broad guidelines so can do everything and anything,” he says.

IMQubator invests in the start-ups, which are coming from both investment banking and funds management, with a three-year minimum investment.

It provides €25 million of assets under management in return for a 25 per cent stake in the company and reduced fees – it mostly pays 1 and 15, Lundgren says.

“We give the managers security of capital which is important to managers at the start up stage. In return we have complete transparency, we know the daily positions and the drivers of the portfolios.” he says. “We know everything that goes on in the portfolio. The fund is still independent, we don’t influence the positions, but we agree before we invest to the outer boundaries.”

As with other service providers and mandates, the investment will be reviewed after three years of operation.

“We want to see our investment managers have good performance but we also want them to be commercially successful.”

While IMQubator will consider any manager, and is in the final stages of a private equity manager setup, it demands a “driven manager with an interesting strategy and proven downside risk management, skill and philosophy”.

For investors in IMQubator there are two facets: the participation fund, but also a multi-manager fund, and the business has absolute return targets to reach for its own remuneration.

In its first year of operation IMQubator has made one investment – in the Branta Solutions Fund, a long/short SRI strategy which analyses environmentally sustainable investments from a behavioural perspective.

It looks at sustainable themes and how they influence prices, for example are solar panels overpriced, or will the results of Copenhagen shift through to equity markets.

“Many new managers don’t make it because they don’t have the infrastructure of the risk management, guidance and monitoring. There is a high mortality rate in new managers. We provide a very controlled environment which will reduce the normally high death rate.”

While IMQubator hasn’t been actively marketing, it does aim to attract other large institutions to invest into the IMQubator fund or directly into the underlying individual funds. The aim is essentially to provide seed money to managers with innovative investment strategies, and to attract them to set up business in the Netherlands.