The Pensionskasse der Mitarbeiter der HoechstGruppe VVaG, the German multi-employer occupational pensions provider, has prepared the ground to “strongly invest” in private markets, Andreas Hilka, the member of the executive board responsible for asset management, told IPE.
The Pensionskasse has carried out preparatory work this year to make further allocations in alternative asset classes such as infrastructure and real estate internationally through external providers, namely investment funds, in addition to private debt.
“That will play a larger role for us in the future,” Hilka added.
It plans to make the strategic shift starting from an already “favourable position” in terms of capital investment, but it wants to further improve it by adding new alternative asset classes to its investment universe, he said.
”Although we do not have a definitive target on how large the allocation should be, we aim to allocate at least 5% of our assets in each of the asset classes”, he added.
Real estate makes up 20% of the allocation in Germany for the Pensionskasse at the moment – the fund wants to go up to 30%. It has requested a permit from the financial supervisory authority BaFin to exceed the threshold of 25%.
The Pensionskasse would not invest in airports or transport infrastructure projects. Instead, it wants to support the transition to a sustainable economy and “a Paris-compliant way of producing energy,” Hilka said.
“Investments in the expansion of networks for energy transition (Energiewende), renewable energies, are therefore most relevant for us,” he explained.
The Pensionskasse had run feasibility studies over the past two and half years for selected asset classes and has consequently discussed the outcome and implications with its supervisory board.
At the end of 2019, the Pensionskasse planned to set up a SICAV fund in Luxemburg to place investments in private markets.
Hilka said it started to build the SICAV fund structure, but at the beginning of 2020 it also started “beauty” parades to select asset managers for the asset classes. But unfortunately COVID-19 changed the schedule and Pensionskasse has not awarded any mandates for the new investments.
Real estate and infra
For real estate, it has decided to change the approach from a beauty parade to exploratory talks with asset managers.
It has learnt that the rent collection rate for diversified real estate funds in Europe is clearly under 100%, in some cases 70% over the last quarters, and “we thought that this can have a valuation impact on the fund as well as the real estate properties acquired,” Hilka said.
Therefore, he continued, “we have decided to be cautious and to wait until next year to see if lockdowns impact high-street shopping, retail and if, when and to what extent people go back to normal life.”
The Pensionskassse wants to review its plans for real estate in Q1 2021, and perhaps start investing as soon as the second half of 2021. It is already a relatively large investor in real estate but only in Germany.
“For infrastructure, we are discussing with investment advisory firms that should support us. We think we will end discussions in November to then sign a contract with advisers, and we will start to invest probably in 2021,” Hilka added.
Currently, the Pensionskasse does not hold investments in infrastructure or private debt.
With the COVID-19 crisis, the fund decided to postpone the move into private debt to 2021, when economic cycles should be clearer.
“It will become clearer how large will be the number of insolvencies and how strongly the portfolio of external managers might be impacted by the insolvencies,” he said.
Transition through Mittelstand
Hoechst-Group Pensionskasse has decided to enter the private market to profit from other investment segments that can be less volatile and better suited to fulfil long-term liabilities leading to long-term returns.
Personally, Hilka found motivation to look into private debt to finance Mittelstände, middle-sized firms, and companies that contribute to transform the economy with green energy, CO2 neutrality, or those in need of capital to grow organically.
The Pensionskasse aims in part to replace listed high-yield bonds with “targeted and stronger” investments in Mittelstände, he explained, adding that it would not support private debt funds that rely on leveraged finance transactions: “that is not our goal.”
“We want to achieve less volatility and good returns and financially support companies that build the backbone of economic activity in the EU.”
The regulatory framework that applies to Pensionskassen may be a challenge for a progressive view on allocation.
A Pensionskasse has to undergo stress tests on a quarterly basis and are required to be fully funded at any given point in time, even though liabilities have a duration of 30 years, he said.
Hilka argued that a Pensionskasse has to have the option to invest by taking risks for the long term: “Under the current regulatory rules this is not entirely possible,” he said.
The Pensionskasse der Mitarbeiter der Hoechst-Gruuppe VVaG has around €8bn in assets. The same management team in charge of it also runs the Höchster Pensionskasse VVaG, a multi-employer Pensionskasse with over €2bn in assets as of December 2019.