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Germany-Based Pension Funds’ Appetite for Alternatives

by Melina Heinl

  • 28 Feb 2019
  • PE
  • HF
  • PD
  • RE

Preqin tracks 94 Germany-based pension funds active in alternative assets, including 34 public pension funds with almost €560bn in total assets under management (AUM) between them, and 60 private sector pension funds with an aggregate €350bn in AUM.

Among alternative assets, Germany-based investors have always favoured real estate: currently, 96% of Germany-based pension funds are actively investing in the asset class. This is in part due to the stability of the market and low purchase prices relative to other countries. Utilized by 70% of pension funds in Germany, direct investment is the most common route to market, closely followed by private real estate funds, which 62% of Germany-based pension funds use to gain exposure to the asset class. As illustrated in the chart below, core and core-plus are the most favoured strategies, suggesting that Germany-based investors prefer lower-risk strategies to the potential for higher returns.

 

The attraction of real estate in Germany is also reflected in the number of private equity real estate (PERE) deals that have been conducted in the country in recent years. The number of PERE deals in Germany grew from 166 in 2014, with an aggregate deal value of €9.2bn, to 628 deals for a total value of €19bn in 2018. So far in 2019, 98 PERE deals have taken place in Germany for an aggregate €1.4bn.

The private equity investments made by Germany-based pension funds follow a similar trend in terms of risk exposure against return potential. Preqin data shows that 48 Germany-based pension funds (comprised of 32 private sector and 16 public institutions) are currently investing in private equity; however, only 50% of these target venture capital vehicles (compared to over 70% of global private equity investors), investments with a typically higher risk/return profile than other private equity strategies.

Hedge funds and private debt are the least favoured alternative asset classes among pension funds in Germany, and are targeted by a comparatively small proportion in relation to all investor types globally. However, private debt is certainly on the rise among pension funds in Germany, as investors’ average target allocations to the asset class are almost double that of their current allocations, demonstrating the potential for future growth.

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