As banks are withdrawing from project financing in real estate and infrastructure, Versorgungswerke like the BVK are stepping in and actively seeking investment partners, finds Barbara Ottawa

It was a novelty, when the €53bn BVK, Germany's largest institutional investor, announced in November last year that it would provide €190m in outside financing for the property deal on the 166m-high Silberturm building in Frankfurt.

"That stirred up the market and people took note," comments Daniel Just, head of asset management at the BVK. "Many were surprised that we had the organisational structure and skills to close the financing deal."

Just is still a bit regretful as initially he had wanted BVK's first deal financing to be for a different, unnamed property: "But we were not the first choice in that deal, so we actively looked for a new opportunity," he says.

"Now people are approaching us and we are very open because we love to answer offers although not all of them match our criteria but there are several very interesting ones among them," he adds.

Similarly, Lutz Horstick, head of the securities and loans department at the doctors' fund for Westfalen-Lippe (ÄVWL), confirms: "Over the last years, Versorgungswerke have been approached more frequently" by project developers looking for financing, or investors looking for partners.

"In our perception, mainly because of the uncertainties surrounding Solvency II, the interests of insurers have changed and consultants have to approach different types of investors," says Horstick.

He points out that while many consultants are aware of the different needs and regulatory environments Versorgungswerke are facing, "the process is still in flux and not yet perfect ".

Horstick continues: "Given our own track record in infrastructure investing, we are often surprised to see how basic the information is we receive from external fund providers in the field but for them it is still a young segment."

However, Ulrich Sonnemann, executive assistant to the CEO at the ÄVWL, adds that in the Amprion deal  "consultants have familiarised themselves quickly" with the special needs of Versorgungswerke.

For Hans-Wilhelm Korfmacher, managing director at the fund for chartered accountants WPV, infrastructure is also "interesting in principle" but he claims that the debate on the subject is lacking clear definition.

"If you are including renewable energy investments, then we have invested a lot in infrastructure via solar and wind energy funds," Korfmacher notes.

He confirms that within the limits of the capital at risk "anything can be considered that provides opportunities at an acceptable risk" including financing real estate deals.

But Korfmacher explains that, given the size of the WPV's €1.8bn portfolio, it has "to take into consideration that building a debt financing portfolio requires a particular organisational structure and that the size of each loan is limited".

One option the fund is considering is "looking into co-operation with other providers already in the market".

This is also a model that has worked for the ÄVWL which will again look for partners for investment consortiums in future to help cut costs it will mainly be looking at other Versorgungswerke to ensure alignments of interest.

"In the past, we have done club deals with insurance companies or syndicated with banks on investments, but regulatory changes have altered the focus and needs of these partners, and we do not want a situation where we might be forced to exit when a partner has to get out of the deal because of regulatory changes," Sonnemann states.

Size and the quest for partners is no problem for the large BVK, which has a structural advantage: being made up of 12 individual Versorgungswerke it can syndicate deals internally, avoiding cluster risks.

"This allows us to take part in high-volume deals and multi-billion projects are also not a problem for us," Just says, adding that this internal syndication speeds up decision processes as, for example, banks have to find and negotiate with external partners.

Nevertheless, the BVK is "actively looking for banks for co-investors in financing infrastructure deals offering steady high cashflow" to grow its deal-financing exposure.
"For us it is important that the bank we choose as co-investor itself provides debt financing to the project over the long term, to ensure an alignment of interests," Just explains.

The illiquidity question
On the question of illiquidity, Korfmacher seeks to clarify the real issue: "Is it the question of realising gains at any point in time, or is it the risk of default?"

"The first is not an issue for us because we are long-term investors," he explains. It might only be a problem for funds with a large share of older participants close to retirement.

One problem for WPV, as for other funds, is market distortions. "It is important how secure - in an age of uncertainty - the underlying is," Korfmacher stresses. "Very good city locations can become illiquid, but will always maintain their value," he believes.

For the ÄVWL, illiquidity is less of a problem than an opportunity to cash in on the illiquidity premium: "For us this is the chance to ensure the required interest rate on the assets of our members and take some of the valuation volatility out of the portfolio," Horstick explains.

He confirms that the ÄVWL has been looking at unlisted shares and real estate to add value to the portfolio through illiquidity.

Sonnemann points out that illiquidity increases the requirements on risk management and asset liability management as it was a "great challenge to quantitatively assess illiquidity and innovation premiums in the framework of our risk-bearing capacities".

"We have a structured risk-management process focusing on reporting and well-defined escalation mechanisms," he notes.

In new projects, the ÄVWL is mainly interested in ensuring "security and certainty" with a long-term view to be better able to assess the risks.

"Looking for long-term business opportunities that will remain intact over considerably more than 10 years ensures that illiquidity does not become a problem during the investment period," Horstick points out.

In addition, stable annual payouts from illiquid investments are an important factor in the investment decision, Sonnemann explains.

Similarly, Just says, "illiquidity is not an issue for us, as the 12 Versorgungswerke in our organisation are still growing strongly and our assets are increasing each year".
For 2012, the Bayerische Versorgungskammer will receive €3.8bn in contributions from its members and another €2bn will be freed from maturing investments.

"That means finding a good investment is more of a problem than illiquidity," Just adds.

Due diligence
In the search for investment opportunities, Just says that three departments within the BVK are involved in due diligence - fixed income, legal department for the contracts and the real estate side for credit financing.

For an infrastructure deal, the team is made up of the structured fixed-income team, as opposed to the ‘plain vanilla' department, the legal department and the alternatives managers which is dealing with the equity side of the infrastructure portfolio.

"It is very important for us to have set up the structures in a way that allows us to make decisions fast, this means that setting up a term sheet for a bidding process only takes us one or two weeks," says Just.

Because "a lot of work, effort and resources" are going into such processes, the BVK only conducts them for investments over €100m.

At the ÄVWL, Sonnemann also points out that "due diligence is becoming more interdisciplinary, be it within the Versorgungswerk, or without where, for example, we had to deal with power transmission regulation for the Amprion project - a topic we could not cover in-house."

"In principle, the structure of the ÄVWL is very lean but we do have a high level of know-how in-house for traditional asset classes, indirect real estate, and alternatives, where we have at least one manager each responsible for due diligence," he adds.

Sonnemann explains that for the real estate portfolio there is a "historically grown" team of experts, analysts, engineers and architects which the Versorgungswerk is employing to ensure that the ÄVWL can "do very indepth due diligence in this asset class".

He also stresses that the ÄVWL aims to ensure internal approval of a project at an early stage, as well as flexibility "to be able to offer its contractual partners a high level of reliability".

The WPV is also "strengthening the portfolio management" because of an investment environment that "has become increasingly challenging" and considering the foreseeable and "significant expected expansion of WPV's assets under management", notes Korfmacher.

He adds that, regarding real estate investments, WPV "wants to be much closer to the property than before". This will be achieved by a master structure set up for direct real estate investments in Germany, which may later be extended to the European portfolio.

"This means we will, in general, continue to hire external managers but we will be closer to the investment decision as we can select managers for certain sectors and regions which will be mandated to manager real estate under the master structure," Korfmacher says.

All Versorgungswerke stress that they "do not have a quota to fulfil", as Just puts it.
"We want to grow our real estate and infrastructure portfolios but only if we find the right investments," he explains. Over the whole of the BVK, exposure to real estate including debt financing is 12% and 2% is invested in infrastructure.

The ÄVWL is currently investing around 4% in pure infrastructure and wants to increase this exposure. Horstick stresses that the 15% top quota in the fund's strategic asset allocation is "just a possible bandwidth". "This allows us to wait for good project without rushing," says Horstick.