German pension funds seek to build investments in alternative asset classes as they offer the prospect of higher returns in growing private markets and protection against rising inflation.
The Versorgungsanstalt des Bundes und der Länder (VBL), the German supplementary pension institution for public sector employees, is considering increasing its allocation to alternative assets, Michael Leinwand, member of the executive board responsible for the asset management.
“We will certainly increase the allocation to private equity, including infrastructure private equity, and private debt, and are making good progress in implementing our private asset platform as well as specific mandates” , did he declare.
However, added Leinwand, “it is still early days and we see this as a long-term journey, and we will carefully consider opportunities strategically.”
Environmental, social and governance (ESG) considerations will also play a crucial role as private assets, and investments in infrastructure, including through renewable energy or social projects, will help VBL have a positive impact for the beneficiaries but also for society as a whole, he added.
With a growing asset base and very long-term, predictable liabilities, VBL is “ideally placed” to invest in less liquid assets and earn their complexity/illiquidity premium over time, he said.
Germany’s largest pension fund, Bayerische Versorgungskammer (BVK), with 100 billion euros in assets under management, will continue to broaden its alternative allocation, particularly in private equity, a spokesperson told Reuters. ‘IPE.
In private equity, BVK continues to focus on established markets in North America and Europe and, in the meantime, the share of private equity investments related to the Asian market has also increased, added the holder. word.
The focus on direct investments in single funds from a fund size of around 1.5 to 2 billion euros will also continue, as well as investments in smaller funds only via accounts. separate and funds of funds.
BVK will continue to increase investments in alternatives, as the potential return “can make a significant contribution to our annual interest rate on pension benefits,” the spokesperson explained.
Its alternative allocation is currently 7% in private equity, 4.5% in infrastructure and 1.5% in timber. It will set an investment quota for alternative asset classes during this year when planning its asset allocation for the entire portfolio.
It will decide which asset classes to cut in order to increase its alternative investments with the new asset allocation plan for 2022, the spokesperson said.
The pension fund for doctors in the Westphalia-Lippe region, ÄVWL, has made a large number of individual debt and equity investments in renewable energy or mobile infrastructure, i.e. financing by borrowing planes, ships or highways, mainly in Germany and Europe, investment director Markus Altenhoff told IPE.
“That’s because our liabilities are mostly in euros. ÄVWL has invested around €3.6 billion in alternatives/infrastructure, which is more than 20% of our asset balance sheet,” he said.
“We are planning new investments in these sectors,” he said, adding that it might be difficult to find those with an attractive risk/return profile.
ÄVWL’s alternative Spezialfonds in Luxembourg invests mainly in private equity buyouts in Europe and the United States (40%), infrastructure investment funds and direct loan funds (around 24% each) and recovery/special situation funds (10%).
“2020 NAV was €2.4 billion and performance around 5.1%. For 2021, the net asset value in November was 2.6 billion euros – we expect an overall performance of around 15%,” said Altenhoff.
Growing private markets
VBL believes that alternative assets have an important role to play in a well-diversified institutional portfolio.
“This is driven by the persistent low yield environment and the need to seek returns beyond traditional asset classes, but also [by] the growing size of private markets and the associated funding needs,” said Leinwand, adding that alternative asset classes are, however, more complex to manage and require specialized resources.
“That’s why VBL recently hired industry veterans to lead the growth of these asset classes in our asset allocation over the next few years,” Leinwand said.
“We also believe that working with the right partners is essential and therefore conduct a very thorough and disciplined asset manager selection process,” he added.
ÄVWL sees a large anti-inflationary impact in equity and real estate investments, as debt is in most cases structured on fixed nominal interest and redemption bases, Altenhoff said.
“Therefore, we will prefer these segments and additionally, to help achieve the Energiewende [the transition to renewable energy sources] and help reduce carbon emissions, we will expand our exposure to green [investment] universe,” he added.
BVK sees the persistent period of low interest rates and the currently high level of inflation as “major risks to our mission of foresight”, the spokesperson said, adding that investing in real assets is, according to the pension fund, the right strategy to deal with crisis situations. crisis.
“We have been pursuing this strategy in a low rate environment for several years, in addition to a broad diversification strategy,” the spokesperson said.
Sustainable and broadly diversified investments remain BVK’s priority to fulfill its pension mission in the long term.