Investment Strategies

Too risk-averse, German insurers suffer

Why is my pension fund not investing in private equity?
  • Why it matters

    Why it matters

    German pension funds and insurers are in trouble – struggling with low yields in a record low interest rate environment. Private equity could be a way out.

  • Facts


    • German asset managers rank at the bottom of the world’s top private equity investors. Deutsche Bank, with $2.9 billion in venture capital, is in 50th place.
    • A survey of 275 institutional investors in Germany concludes that many German asset managers are taking initial steps in the direction of private equity investment, but from a very low base.
    • While German institutional investors like insurers feel growing pressure to invest in riskier, higher-yield securities, they also feel constrained by tight regulation.
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In the mid-1990s, Mark Wiseman wanted to buy a suit at Bergdorf Goodman, a luxury goods department store in Manhattan, but he was deterred by the store’s high prices. Two decades later, Mr. Wiseman, the head of the Canada Pension Plan Investment Board, bought the entire store.

He acquired Bergdorf’s parent company, the Neiman Marcus Group. It’s an investment he can afford, because he manages assets of more than $265 billion (€243 billion) for the pensions of 18 million Canadians. In the last 10 years, Mr. Wiseman achieved an average net annual return of 8 percent for the fund.

It’s a return that Germany’s struggling life insurance companies can only dream of. Most currently offer a guaranteed return of just 1.25 percent.

The old way of doing business simply doesn’t work anymore – and is even threatening some insurers with collapse. Investing in safe government bonds, the usual tack for institutional funds looking for long term stability, yields barely anything in these days of record low interest rates.

The key to investment success, instead, seems to lie in private equity. The Canadians are currently the world’s top investors in private equity, with total invested assets of $28 billion. The list of the 50 top investors in private equity continues with dozens of other Anglo-Saxon investment firms.

The first German name on the list, Allianz Capital Partners, an offshoot of the world’s largest insurance company Allianz, appears in 43rd place with a venture-capital investment of just $3.8 billion. Deutsche Bank, with $2.9 billion invested in private equity, barely managed to eke out a last-place finish among the world’s top 50 private equity investors.

“In the past, it was convenient to invest only in government bonds every year, but those days are gone.”

Michael Busack, Managing Partner, Absolut Research

While U.S. foundations and pension funds have more than offset meager interest rates on government bonds with other investments, especially in private equity, but also in other alternatives like infrastructure and hedge funds. But such “alternative assets” remain also-rans among more cautious German institutional investors.

“Institutional investors in Germany still approach alternative investments such as private equity with restraint. As a result, they are absolutely giving up yield opportunities,” said Michael Busack, managing partner with consulting firm Absolut Research.

Insurance companies and pension funds are now being forced to address new realities, he added. “In the past, it was convenient to invest only in government bonds every year, but those days are gone,” said Mr. Busack.

Under growing psychological pressure, many asset managers have already taken initial steps in this direction, according to a new survey of 275 institutional investors in Germany, conducted by consulting firm Greenwich Associates.

“The low interest-rate environment makes it impossible to achieve yield objectives. We have been unable to come up with a solution so far,” said the manager of a German public pension fund, who declined to be named.

According to Greenwich Associates, only tentative efforts have been made by institutional investors to retool their investment policies, despite growing awareness of the problem. Bonds have dropped to 74 percent of total portfolio investments in the current year, compared to a peak of 80 percent in 2013.

So far, the money that has left bonds has shifted heavily in the direction of real estate, which increased from 5 to 7 percent of total investments, along with a higher percentage invested in equities. Few have looked to private equity as an answer.

According to Greenwich, many respondents to the survey complained that they’re in a catch-22 situation: On the one hand, they feel the pressure to try out new things and adjust their risk profiles upward; At the same time, they are obligated to comply with rigid regulatory requirements.

“Regulation of insurance companies leaves us with little latitude. We are forced to invest a significant portion of our portfolio in fixed-interest securities and investments with a high credit rating, which makes the market even more limited for us than for most other industries,” said one survey respondent.

According to the survey, most institutional investors therefore don’t expect to see any sweeping changes in their portfolio orientation in the next three years. But some are starting: A significant minority of investors said they are planning a strong increase in the types of investments from which they anticipate higher returns, Greenwich points out.

For this reason, 13 percent of major investors aim to “substantially increase” their invested funds in private equity.

Greenwich consultant Lydia Vitalis warned against “expecting dramatic changes” in the short term. Nevertheless, she added, at least changes in investment policy are now on the table.

One of the challenges is to win over members of advisory boards and investment committees, who tend to be more familiar with conservative assets and wary of riskier ones.

“The investment manager isn’t the only one who has to be convinced of the necessity of changing direction; the decision-making bodies also need to be brought on board,” said Gunnar Leitz, head of capital investment with pension fund Wacker Chemie VVaG.

There are often reservations regarding private equity in particular, he added, but noted that this is perfectly normal, given the complexity of this investment class: “People are cautious, given their experiences with the financial crisis,” said Mr. Leitz, whose stake in private equity, at 5.2 percent of total managed assets, is well above the average.

Mr. Leitz said the changes don’t necessarily have to be dramatic to make a difference. Many pension funds can operate within existing rules and still make extra money. The total amount of venture capital in his own pension fund’s portfolio is probably no more than 15 percent, which includes both infrastructure investments and private equity. It’s something the fund has cultivated since since 1997 and he is “very satisfied” with the result.

“In my opinion, further changes in the law that would facilitate investing in private equity are not necessary at this point, given that most insurers and pension funds have not exhausted the existing framework for private equity,” explained Mr. Leitz.

However, the venture capital business is complex. “Entering this asset class is certainly associated with a considerable time commitment and analysis effort,” said Anton Buchhart, head of capital investment with Barmenia.

Nevertheless, increasing investment in private equity is probably inevitable.


Peter Köhler covers private equity and fund managers for Handelsblatt in Frankfurt. Robert Landgraf is Handelsblatt’s deputy finance chief. To contact the authors: and 

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