German pension funds are increasing allocations to private markets while closely monitoring costs, liquidity and valuations.
Bosch Pensionsfonds plans to gradually lift its private markets exposure from the current 21% to 24% of total assets, following positive experience with high-return strategies, the pension fund for employees of the engineering and technology group said in a statement.
Bosch has, in recent years, built a balanced exposure across private equity, infrastructure equity and private debt, and intends to continue this approach.
“However, in the future, implementation will increasingly take place through separately managed accounts. The goal is to better implement individual strategies while simultaneously achieving greater transparency and lower costs,” it added.
The pension fund for the financial sector, BVV, welcomed the new quota for infrastructure investments introduced for Pensionskassen and pension funds for professionals (Versorgungswerke), saying the change creates new opportunities.
The new infrastructure quota is seen as a “bonus” that frees up capacity for other asset classes, said Christian Wolf, head of risk and quality management at BVV Pension Management.
“Interestingly, 50% of the Pensionskassen invest in infrastructure already, and more than 50% in private debt, also through fund of funds,” he added, speaking at an event organised by the occupational pension association aba last week.
BVV targets 12% of assets in infrastructure, real estate and corporate debt, and 16.8% in real estate, infrastructure equity and private equity, according to Wolf’s presentation.
“We have noticed as investors in the last few years that liquidity inflows from alternatives don’t come as planned; that is a liquidity management [issue]. In terms of operational risk management, the question is: how do I get a consistent risk assessment, consistency of valuation methods? That is a challenge,” he said.
Among smaller Pensionskassen with at least €250m in assets, around one third invest in private equity, while among the larger ones – those with at least €1bn – more than half invest in the asset class, mainly through fund of funds, he added.
Alternatives account for just over 11% of the total €200bn managed by Pensionskassen, and around 18-19% of the €300bn managed by pension funds for professionals, according to data from consulting firm GAC.
Real estate allocations stand at just over 13% for Pensionskassen and 22.5% for Versorgungswerke.
“The weighting of alternatives has grown even more dynamically than real estate alone. While real estate allocations stagnated or declined slightly in the last two years – partly due to necessary write-downs – the exposure to illiquid alternatives has frequently been further expanded (by pension funds),” said GAC’s managing director Manfred Mönch.
Consultancies are also refining strategies to improve access to private markets.
WTW has adjusted the strategy of its Spezialfonds Robust and Dynamik, which together manage €1.5bn, to allow up to 20% to be invested in private markets.
“With our solution, even smaller pension funds can benefit from the advantages [of those investments], without complex fee models,” said Benjamin Carreras Painter, director and manager of the Spezialfonds at WTW Investments.
WTW plans to expand infrastructure and private credit allocations, expecting long-term net returns of 5% and 6.3% from the Robust and Dynamik funds, respectively.
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