Bayerische Versorgungskammer, Erafp, Railways Pension Scheme, CalPERS e CalSTRS. From 200 million euros allocated by the French fund, to 500 million of the German one, up to billions in the UK
In 2014, Bayerische Versorgungskammer, the largest German pension fund, selected Pantheon for the management of a special private equity account worth over 504 million euros. Last year, the French Erafp, that provides supplementary pensions to the civil servants of Paris and has assets under management for 26 billion Euros, gave a mandate to manage 200 million euros in private equity funds. Small steps that show a change.
According to the latest Pension Markets in Focus report drafted by OECD (Table 2, here), the asset allocation percentage of direct investment in private equity funds is still very low: 1% for Germany and Spain, 2% for Switzerland. In Europe, looking at the category of other investments (which includes real estate, infrastructure, and PE and VC), we find that the countries with most alternative pension funds are in Scandinavia: Denmark (36%), Finland (17%). The United Kingdom is obviously among the innovators (22%), but also traditional countries like Japan invest massively in alternative assets (51%). Italy invests a paltry 4% in alternative assets.
But this trend exists and it is growing. As noted in the Global Pension Funds by PwC: globally, all pension funds are progressively increasing their exposure to these alternative assets. In particular, in Northern Europe the preference goes to direct investments in local real estate, another focus is business financing. Exposure to alternative investment ranges from 3% of the Norwegian Government Pension Fund Global to 32% of the Finnish Varma Mutual Pension Insurance Company. In the United Kingdom, the Railways Pension Scheme has invested 23.5% of its total assets of 5.6 billion in alternative funds. Private equity is worth 2.3 billion pounds.
And the USA? The largest Yankee pension fund, the Federal Retirement Thrift, with an AUM of 458 billion dollars, has no exposure to alternative investment. While the other six major pension funds in the country, including the California Public Employees Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) – with a combined AUM of 716 billion dollars – have allocated 29% of their portfolios in real estate and private equity. US strategies on PE are very precise: the public sector fund holds most of its positions in buyouts (60%), while VC represents only 1%. The teachers’ fund instead has a slice of 19.3 billion dollars or 10.1% in PE.
If the Anglo-Saxon world on both sides of the Atlantic pulls the sprint, it is clear that on the Old Continent the movement of institutions towards PE has just begun: encouraging this drive is a necessary action that would advantage both sides of the relationship, that is, PE and VC on the one hand and pension funds on the other. The reasons of this are explained by Invest Europe, the association that represents European PE and VC, according to which pension funds are PE and VC’s main source of funding, having helped to collect one third of the total European capital intended for these sectors in the last three years. On the other hand, pension funds share with VC the fact of having a long-term prospect and can certainly obtain from VC higher long-term returns than those of classic equity or bond investment. This is “a marriage that has to be performed”, without any doubt.