German Asset Management: Willing but mostly unable
Low yields mean German institutions continue to look at infrastructure. But the opportunities they find are mostly unattractive, says Barbara Ottawa
By the end of 2014, 33 closed-end alternative investment funds (AIFs) will have been set up – nine of them will specifically target institutional investors and most will offer either real estate or infrastructure investments.
These are the findings of the German real asset association (BSI), the former closed-end fund association GDF, which renamed itself last year in the wake of the implementation of the EU-wide Alternative Investment Fund Manager Directive (AIFMD) via the KAGB (Kapitalanlagegesetzbuch) in Germany.
All closed-end fund providers must now have a KVG licence, in the same way that open-ended fund providers have had to reapply for this licence, even if they previously operated as a KAG.
“Further asset classes are entering the regulated field,” says Jörg Ambrosius, senior vice-president at State Street in Munich. “Many institutional investors have set a target allocation for infrastructure but are not finding the right investments with the necessary political stability and alpha,” he adds.
At a glance
• German pension funds’ exposure to infrastructure is currently around 2%.
• This is set to increase but a lack of suitable vehicles and opportunities are preventing investment.
• Privatisation of infrastructure is not yet necessary and is not part of the German mind-set.
• There are fears that a surplus of investors could dampen returns.
According to Ambrosius, investment opportunities in infrastructure are difficult to find in countries with stable economies like Germany, as they can refinance projects at ultra low rates. “So why should they privatise?” Ambrosius asks.
Stephan Kloess, head of KRE KloessRealEstate consulting, points out that countries like Germany, Switzerland or Austria are not used to alternative financing for infrastructure projects.
Foreign investors keen on Germany’s stable economy are also often disappointed. “Looking at the investment opportunities in German infrastructure more closely it becomes clear very soon that far fewer of these opportunities can be found than in the UK, for example, where privatisation of infrastructure is more common,” Matthias Reicherter, head of infrastructure at Golding Capita, says. However, he sees a change in the approach of the German authorities and expects more investment opportunities to be available in future.
Kloess points to a widely-cited OECD statistic calculating demand for global infrastructure investments of $50trn (€39trn) by 2030. “This is an amount countries cannot afford on their own, even in an environment with very low interest rates,” he says, although he adds that institutions prefer domestic investments where they know the regulatory and political frameworks.
Additionally, Kloess sees a perception problem with infrastructure investments in institutional portfolios: “Unfortunately, infrastructure is not yet seen as an asset class in its own right. There is also no regulatory ‘bucket’ for it, which means it is seen as an alternative investment competing against other investments in this segment.”
Statistics confirm the very low exposure to infrastructure among German investors; between 2011 and 2012, prior to the implementation of the AIFMD, the capital earmarked for infrastructure investments dropped considerably as investors were unsure what to expect from the new regulations. According to figures reported by the BSI, institutional investors had almost completely withdrawn from infrastructure to shift their assets into real estate – through both open-ended and closed vehicles.
For 2013, the BSI reported a total volume in infrastructure of €2.4bn and another €10.3bn in the energy projects.
Golding Capital Partners, a closed-end fund provider, has found in a survey that 40% of institutions have already invested in infrastructure, with allocations of up to 3%.
Markus Götz, managing director at Chorus Vertriebs GmbH, which specialises in renewable energy investments and other infrastructure opportunities, says his company is conducting a survey among institutions on their infrastructure exposure, although he confirms that allocations are still small. He cites figures collected by the German insurance federation GDV showing that infrastructure and renewable energy made up less than 1% of the €1.4bn assets invested by insurers overall.
But the GDV says insurers are interested in increasing this share, and Germany’s economics minister, Sigmar Gabriel, has formed a working group with insurers to develop models to facilitate investment. However, Götz cautions that a major inflow of new assets to infrastructure could dampen future expected returns, although he believes returns will remain stable over the medium term.
While Kloess also sees “major interest” in infrastructure, he says it will not be a major leap. “Institutions want to double their infrastructure allocation, but from a very low level of around 1%,” he says. But often there is insufficient supply or the wrong vehicles are offered. “Listed vehicles do not relate to what investors expect from infrastructure and there are too few non-listed funds serving the requirements of investors, as well as managers with a long enough track record,” Kloess continues.
Götz notes another problem in that the risk benchmarks many investors are using “cannot be applied to infrastructure investments”. He says Chorus is working on benchmarks and approximations that investors falling under the insurance supervisory regulations can use. Furthermore, the company is thinking about setting up debt constructions that are more likely to fit in with German insurance law and Solvency II.
Reicherter says: “Many institutional investors have come into this asset class via renewable energy like wind parks or photovoltaic systems. But today their focus has broadened, particularly to include investments in the field of social infrastructure such as schools, hospitals and roads, as well as investments in so-called regulated assets like electricity and water plants or telecom infrastructure.”
Fabian Pötter, investment director at Golding Capital, says: “In portfolio construction, investors aim for the broadest possible diversification over geographies and infrastructure segments.”
Kloess also emphasises that the infrastructure universe is highly heterogeneous, extending from brownfield to greenfield developments in various sectors worldwide. “All sectors and regions need their own expertise and for each the business model is different – this means we cannot really speak of one asset class.”
For Götz there is a problem for foreign investors – differences in the implementation of AIFMD in various countries. “A harmonised interpretation of AIFMD across the EU would certainly help make markets more accessible for foreign investors,” he says
All market participants agree that interest in infrastructure investments among German institutions is unbroken. And Golding Capital, which has operated in the market since 2000, notes that this is not just a trend since the financial crisis, although the process is obviously supported and propelled by the current low-interest-rate environment.
“More and more investors see that the long-term, stable income that infrastructure investments can provide fits their portfolio strategy very well,” adds Reicherter.
So the market expects more and more German institutions to increase their infrastructure exposure. But as Kloess notes, this will be a very slow process.