Institutional investors tend to make more PE direct investments
In recent years, Canadian pension funds such as CPPIB (Canada Pension Plan Investment Board) and Ontario Teachers have been particularly successful with direct investments, while U.S. pension funds have tended to act more conservatively. US pension funds in particular now seem to want to make up for lost time. Instead of putting money into funds managed by outside third parties, so-called funds of funds, pension funds are increasingly willing to invest directly due to their many years of private equity experience. In the low interest rate environment of recent years, direct investments were made in particular in real assets such as infrastructure and real estate, which provided comparatively secure, predictable returns.
Increasingly, we see growing interest in mid-sized, German companies with a strong technology focus that show significant growth potential. In general, however, it should be noted in this context that direct investment in companies continues to be the exception. This is due in particular to the fact that institutional investors often do not have the specific industry knowledge to realize the value enhancement potential of the companies.
A further increase in direct investments, not only by pension funds but also by insurance companies, can be expected. The growing interest of such institutional investors in direct investment is statistically verifiable. According to studies, the volume of alternative investments has doubled since 2005 to more than $7.2 trillion.
In view of the fact that the growth potential for investments in real assets, especially infrastructure investments, appears to be largely exhausted in Germany, we assume that the focus of foreign pension funds will continue to shift towards direct investments in technology companies.
German institutional investors are also diversifying their investment strategies. Alternative investments are becoming increasingly important in a low-interest environment. A diversified private equity portfolio can meet all market requirements and still generate attractive returns. US pension funds already invest 9.4% of their portfolios in private equity. However, private equity has a different history as an alternative investment for institutional investors, particularly in the US. According to surveys, however, a significant proportion of institutional investors are considering increasing their allocations to private equity in the coming year.
About Florian Hirschmann
Florian Hirschmann advises clients in the field of corporate law, in particular on national and international private equity and M&A transactions, venture capital and joint ventures. — Florian Hirschmann is also co-head of the China Desk at DLA Piper. In this context, he and his German-Chinese team have extensive experience in China-related mandates, in particular with Chinese investors in Germany as well as joint ventures of German companies in China or M&A transactions.