Swiss pension funds are increasingly focusing on infrastructure while remaining cautious on private credit and private debt, which have been hit by a wave of redemptions, according to local industry consultants.
“Infrastructure assets are interesting to pension funds primarily due to their cashflow structure and risk profile,” Philipp Weber, head of investment consulting at Mercer Switzerland, told IPE, adding that his firm had observed “particularly strong interest” in the sector among many Swiss pension funds.
In 2020, the Swiss parliament approved changes to the investment regulation of pension funds, which led to infrastructure being deemed an independent asset class under the alternatives umbrella – a move that impacted the decision-making process of many schemes already looking at the sector.
For many pension funds, the regulation simplified the integration of infrastructure assets into their overall portfolios, Weber explained.
Andreas Rothacher, head of investment research at consultancy Complementa, agreed, stressing that the “main interest” of Swiss pension funds was currently “clearly on infrastructure assets”.
“Core [infrastructure] assets in particular, can serve as an illiquid substitute for bonds,” Rothacher said. “More than half of Swiss pension funds are invested in this asset class.”
The generally positive performance of the sector has also proved a boon for its current popularity, he added.
Selective approach
However, not all alternative asset classes enjoy the same degree of popularity among Swiss pension funds.
The recent spate of redemptions in private debt, for example, has nudged pension funds to rethink their approach to the asset class.
Investment committees and boards of trustees have raised questions in recent months particularly in light of headlines surrounding certain “evergreen” structures, Mercer’s Weber said.
“These developments have sharpened institutional investors’ awareness of structural, liquidity and governance issues,” he said.
Swiss pension funds remain, however, largely unaffected by these developments, given their long-term investment horizons and preference for products designed for institutional investors.
Mercer has noted an “increased selectivity and more rigorous due diligence” by pension funds investing in private markets, rather than widespread reluctance or a fundamental strategic shift away from alternatives, Weber said.
According to Rothacher at Complementa, pension funds are carefully weighing their options when conducting their internal asset and liability management studies, designed to determine whether a new asset class can provide added value, either through net returns or risk reduction – or a combination of both.
“There is no general aversion towards private markets, as showed by allocations to unlisted Swiss real estate and infrastructure, though critical voices are currently being heard regarding private equity and private debt,” Rothacher said.
Pension funds are reluctant to start investing in private debt given the recent developments, he added.
Invest ‘once headlines calm down’
Rothacher said his firm believes interest in private debt could rise again “once the headlines calm down”, while the exit environment needs to improve further in order to reignite the interest of pension funds.
“Investors expect genuine exits rather than continuation vehicles, and capital repayments,” Rothacher said. ”Private equity must demonstrate that it delivers added value over public equity, after costs.”
While some managers have certainly succeeded in doing so, returns – at least on average – have fallen short of expectations in recent years, he added.
PPCmetrics said it had not observed significant reductions in existing target allocations in private equity, private debt or infrastructure – due to the long investment horizon of pension funds.
“The demand for Swiss real estate remains consistently high,” said the Swiss consultancy’s Romano Gruber, head of team asset manager selection and controlling illiquid investments. “The reasons for this include the attractive performance seen in recent years, comparatively stable returns and the high level of familiarity Swiss pension funds have with this asset class.”
Moreover, despite the recent rise, interest rates remain at a historically low level, which continues to support demand for Swiss real estate investments, Gruber added.
