German professional pension funds, Versorgungswerke, are moving towards an average allocation of 7% to corporate private equity, beyond an average 5% exposure expected for institutional investors in the coming years, according to a survey by BAI, the German association for alternative investments.

Versorgungswerke have the highest allocation to alternative investments (over 35%) among institutional investors surveyed. Real estate accounts for 16% of their allocation, private equity for more than 6% and infrastructure equity 4%, it said.

The survey also showed that 13-19% of Versorgungswerke plan to enter infrastructure equity and debt, and corporate private equity for the first time, leading to a shift in strategic allocations within alternatives.

The strategic asset allocation for Versorgungswerke foresees alternative investments going up to 40%, driven by infrastructure equity and debt, and corporate private equity and debt, the association said.

Total assets for the surveyed Versorgungswerke amount to approximately €230bn, with the average scheme managing around €8bn. It also revealed that 63% of the professional pension funds surveyed pursue an ESG strategy and 70% an impact strategy.

Pensionskassen and Pensionsfonds, instead, invest 24.25% of their assets in alternatives, with over 50% allocated to real estate equity and 77% pursuing an ESG strategy.

Overall, the share of alternative investments in the portfolios of German institutional investors has increased by 4.5% year-on-year in 2021 to 22.7%. BAI expects that share to rise to 25% in the next few years.

Within alternative investments, institutional investors allocate mostly to real estate equity (77%), corporate private equity (75%), infrastructure equity (70%) and corporate private debt (66%).

Looking ahead, BAI sees growth potential particularly in private debt markets, infrastructure equity and corporate private equity.

According to the survey, 88% of respondents said the benefit of investing in alternatives is portfolio diversification, 74% said it ptovided a good risk-return ratio, 64% said they allocate to alternative investments because of illiquidity premium, 44% because of the current low interest rate environment, and 43% for the complexity premium.

The results added that investing in alternative asset classes also represents a hedge against inflation and they can generate cash flows, for example in portfolios that have increased infrastructure equity and debt allocations.

The study noted however that, in spite of the COVID-19 crisis, portfolio allocations have not shifted markedly towards alternative asset classes. The realignment of portfolios continues, though, with 68% of the surveyed investors pursuing an ESG strategy whilst 32% not.

The survey saw 104 German institutional investors participating, managing more than €1.7trn in AUM.

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