SOKA-BAU, the German umbrella organisation of the two pension funds for the employees in the construction industry ULAK and ZVK, is targeting an allocation to private markets of 15%, up from the current 5%, with a view to making its first move into private debt, reaching a strategic allocation of 5%.
SOKA-BAU can invest at least €600m per year across all asset classes to meet its target and is currently looking for external fund managers to run the assets, Gregor Asshoff, management board member responsible for asset management, told IPE.
“Private markets are an important part of the portfolio for SOKA-BAU and our strategic asset allocation foresees an increase of the quota to around 15% of total allocations in the medium-term. We currently have around 3% of total assets invested in infrastructure and private equity,” he added.
Asshoff explained that SOKA-BAU will gradually build up investments in infrastructure and private equity to 5% each and, in addition, it will invest in private debt for the first time in the near future, aiming for a quota of 5%.
“By investing in private markets we are trying to counter the persistently low level of interest rates,” Asshoff said, adding that the organisation is able to capture the illiquidity premiums intrinsic to alternative investments.
The pension funds expect “attractive return opportunities” in alternative asset classes, taking into account risk capital available, he said.
Going forward, SOKA-BAU will reduce its share of bonds in its investment portfolio, which now makes up slightly more than 50%, on top of 16% in equities, 27% in real estate and close to 5 % in private markets.
Total assets under management stand at €12.8bn, split into €2.5bn in the holiday and wage equalisation fund (ULAK) and €10.3bn in the pension fund for the German construction industry (ZVK), both under SOKA-BAU’s umbrella.
“We have a risk investment ratio limit of 35% based on the German investment regulation (Anlageverordnung) and in about two years we will have reached that threshold,” Asshoff said.
He added: “To continue our strategy to increase our private markets and equity investments up to 20%, we have to discuss internally whether we are making use of the statutory option to exceed this risk rate by 10 percentage points.”
For real estate, which traditionally plays an important role, SOKA-BAU has set a strategic quota of around 25%, split into directly held residential real estate properties in Germany and global indirect investments.
“By investing in private markets we are trying to counter the persistently low level of interest rates”
Gregor Asshoff, management board member responsible for asset management at SOKA-BAU
The organisation is strengthening its indirect investments in real estate in the medium-term, making sure there is adequate diversification.
“Years ago we made indirect investments in office properties in Canada, Europe, the US and Asia/Pacific for the first time; meanwhile we have also invested in logistics, retail, affordable housing, health care and, in addition to classic fund products, we also back co-invest,” Asshoff said.
The new mandates in real estate are almost exclusively outside Germany or Europe, he said, adding that SOKA-BAU has recently made investments in selected locations in Latin America for the first time.
“In the case of indirect real estate investments, we rely on fixed-term investments,” he said.
Global view in niches
SOKA-BAU’s strategy builds up on a risk-adjusted portfolio diversified across all relevant asset classes worldwide.
“In all asset classes we try to invest across all regions, including Asia. More precisely that means that we invest a certain quota for each asset class in each region, based on the region’s GDP,” the head of asset management said.
At the moment the organisation would like to hold about 30-35%, or one third, of each asset class in the Asian markets, but expanding private market investments in Asia is not easy at times.
For example, Asshoff said, “private equity is much more developed in the US than in Asia. In Asia, private equity is a relatively young asset class.” Therefore SOKA-BAU has not yet reached the 30-35% investment quota in private equity.
“In private debt we have not yet invested but it is our goal to reach a share of 30-35% of the asset class in Asia, too,” Asshoff said. “Based on GDP we should hold more than 40% of our investments in private debt in the Americas and 25% in Europe.”
SOKA-BAU allocates in niches within individual asset classes to achieve additional returns – timber is one of such niche investments for example.
“The initial investment [in timber] amounts to about €100m and we hold investments in the US, South America and New Zealand. We are planning to further increase investments in this type of asset,” Asshoff said.
The strategy, in this case infrastructure, is the same as for the different asset classes. “When we enter an asset class we look for a manager with core investments, probably worldwide, or at least in a larger region, with limited risks so that we gain experience with the asset class,” he said.
Once the organisation has gathered enough experience with the asset class it starts investing in niche products. Other examples of niche investments include kindergarten in Australia, and in cool logistics properties in Australia and South East Asia.
Inflation and ESG
At the moment SOKA-BAU does not see the “immediate need” to readjust its allocation to a “great extent” or to change strategy to respond to high inflation, Asshoff said. It pursues a medium to long-term strategy.
He added: “We have enough reserves to deal with the impact of an interest rate hike on bonds. We had a good performance in the last three years with an average return of 6.5 %. With reserves of 40% and the long-term obligation to achieve at least a return of 3% each year, we can withstand high inflation and some volatility.”
SOKA-BAU has in recent years consistently increased the share of its investmens in real assets of its strategic asset allocation to around 55% in order to be able to counter persistently low and negative interest rates. Investments in real estate, equities and alternatives can provide adequate protection against inflation.
The group is also working on a climate strategy together with asset managers to urge companies to adhere to the Paris Agreement.
“The signing of the UN Principles for Responsible Investment (UN PRI) in 2020 underscores the importance of sustainable investment to SOKA-BAU,” Asshoff said.
The group regularly screens its liquid portfolio with data providers, and monitors the compliance with the UN Global Compact (UNGC) Standards. It reports ESG ratings of strategies and investment on a yearly basis.
“This builds the foundation to lead and support companies on their way to a more sustainable behaviour,” Asshoff said.
Companies acting against the UNGC criteria are put on a watch list and undergo a closer screening process that can lead to disinvestment.
For illiquid asset classes SOKA-BAU faces the problem of missing an “appropriate and acknowledged database”, therefore it hands out to managers a long and detailed set of questions to assess their compliance with all ESG criteria before investing in their products.
“During the investment phase, we repeat this by sending them an updated and more specified questionnaire. If the ESG improvement process of the manager is not successful, this can result in a disinvestment,” Asshoff said.
The asset managers must prove before and during a mandate that the principles for responsible investing are taken into account in investment decisions.
“We are working intensely with asset managers on the further development of the ESG criteria and their implementation in investments. Together, for example, we look for ways to reduce our carbon footprint and invest in strategies that deliver a positive social and/or ecological impact,” he said.