German pension investors are inclined to build more sustainable relationships in private equity investments with asset managers that are at times perceived as too aggressive in the way they conduct business with asset owners.

Recent market developments seemed to have changed private equity asset managers’ attitudes leading to an improvement in talks with asset owners, according to Martina Nitschke, head of investment at VGV Verwaltungsgesellschaft für Versorgungswerke, an association of eight pension funds for professionals with assets close to €16bn.

Speaking at the Alternative Investor Conference organised by the Bundesverband Alternative Investments e.V. earlier this month, Nitschke addressed the asset management industry by saying “to not put us under pressure” to act on private equity investing.

“I hope that the GPs [general partners] dominated market that we have seen in the last few years shapes a little bit in favour of LPs [limited partners]” as negotiations have been difficult in the past, said Kathrin Kalau-Reus, head of private equity, infrastructure and timber, at Bayerische Versorgungskammer (BVK).

BVK has seen a strong investment pace in private equity in the past months.

Kalau-Reus said: “I have the feeling that the managers have not invested so much money so quickly in companies […] I miss the discipline for fundraising of GPs,” which tend to compete among each other over who comes back to the market first. This dynamic might not be healthy for the market, she added.

BVK, the largest pension fund in Germany, is at the moment over-invested in private equity with an allocation of 9-9.5% from a planned threshold of 7%. Its alternative portfolio totals €21.5bn, with the largest part (€15bn) in private equity, while €5bn is invested in infrastructure and €1.5bn in timber.

In the next few months BVK will review its portfolio looking at managers that “convince us not only for the performance but also for communication, transparency” and attitude towards cooperation, Kalau-Reus said.

BVK will prioritise private equity among its alternatives portfolio for the next 12 months.

As for VGV, it invests 27% in liquid asset classes, equities and bonds, up to 40% in alternatives – including private equity, private debt, timber, infrastructure and hedge funds – and 30% in real estate, according to its strategic asset allocation.

It will put on the brakes for private equity in the next year, said VGV’s Nitschke.

Geopolitics, inflation and interest rates

Stefan Schütte, head of fixed income and private debt and Versorgungsanstalt des Bundes und der Länder (VBL), said that for the last seven months VBL has been in the midst of an “exciting phase with a new direction” in terms of investments in private markets.

He said that at the moment VBL does not hold an alternatives portfolio and added that the current geopolitical situation has hit other asset classes. The fund will tackle investments in alternative asset classes in the next 12 months, he said.

The geopolitical situation, inflation and the rise in interest rates have had an impact on all asset classes, including private equity and infrastructure but also real estate, said Nitschke, adding that “the topic of risk management is becoming more and more important”.

Looking at crises, the COVID-19 pandemic instead has not ffected the performance of BVK’s private equity portfolio, while taking inflation into account, it will be interesting to see if infrastructure will deliver protection as an asset class, Kalau-Reus said.

She added that BVK has 30% of its assets invested in renewables, which is a good strategic stance considering the current energy crisis resulting from the war in Ukraine.

For Schütte, the conflict in Ukraine would force pension investors to be disciplined and to “look more closely“ at alternative investments, “the demand of due diligence on credit increases because of the complexity that we face” and inflation protection.

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