By Muskan Arora
A surge of interest in defense investments in Europe is breathing new life into the military industrial supply chain, said Peter Kohler Lindegaard, the chief investment officer of Denmark-based Industriens Pension.
In an exclusive interview with Markets Group, Lindegaard said some sub-suppliers in German manufacturing potentially stand to benefit from European investors’ shift from U.S. equity to defense investments. For example, he noted German automotive sub-suppliers could be retooled for use in the defense manufacturing industry.
While the plan has not made any direct commitments to the automotive industry, he said private equity opportunities will likely arise in these “dual-use” sectors.
The technology and data protection sectors will also see increased investments, said Lindegaard, noting innovation in this area would allow Europe to grow at a faster pace.
He noted another shift — in particular, with U.S. fixed income — is afoot, noting investors are a little more hesitant to invest in U.S. government bonds. The U.S. government is very dependent on foreign nations to buy its bonds. “It seems that the investments are continuing to fund the budget deficit, which is now becoming more and more of a stretch,” said the CIO.
Lindegaard pointed out foreign nations are increasingly losing confidence in the U.S. dollar, particularly since it’s seen some fluctuations amid the tariff reality unfolding.
“The price on the yield of the securities that they need to get people to invest in them could be higher. If that’s the case, if you hold those securities then you would have a loss on the price.”
While the Russia-Ukraine conflict has made the defense industry more acceptable, sustainable practices are still very much a focus for Industriens Pension. Both transition and physical risk are considered in the decision-making process surrounding allocations, with preference given to companies focused on renewables, including wind, solar, transmission and storage.
The pension plan is taking an active approach to sustainability, engaging in dialogue through partnerships. “This is by talking to [investee] companies and asking them how they’re doing with their efforts, including about their emissions, whether they’re preparing to transition to other fuels, whether they have any [associated] risks with rising temperatures and what is their contingency [plan].”
Since the path to net zero is taking more time than originally thought, it’s costing pension funds less to de-carbonize their assets, said Lindegaard.
“On the other hand, the physical risk is going to be pertinent, because … when temperatures rise, [and] they’re probably going to rise more than two degrees, a lot of assets out there are going to be impacted.”
He’s also prioritizing labor rights by divesting from companies that “actively try to dissuade the workers from unionizing.”
Lindegaard uses private credit as the financing part of private equity allocations.
This balancing act provides some insulation for the plan as when interest rates rise and private equity returns diminish, its private credit investments provide a cushion as they are on floating-interest rates. While it’s challenging to allocate out of private equity and into private credit, at least one can steer its commitments a bit to get risk-adjusted returns, he added.
Since the coronavirus pandemic, traditional lenders, such as banks, have pulled back on spending, making it more difficult for companies to access cash. Many institutional investors are filling that gap. Indeed, Industriens Pension’s private credit allocations are comprised of syndicated loans, direct lending, and distressed debt, with a focus on non-cyclical companies.
The pension plan allocates 7% to its private credit portfolio, against a target of 9%. For the fiscal year-end 2024, it reported a return of 3.19% for its private equity portfolio and 9.25% for its private credit portfolio.
