LONDON Oct 25 Yield-hungry pension funds and
sovereign wealth funds are stepping in where crisis-hit,
regulation-laden banks are pulling back: lending to cash-starved
Pension funds hold more than $30 trillion of assets and
sovereign wealth funds some $3-5 trillion, meaning that even a
small shift to lending could help fill some of the gap left by
One new investment that is increasingly popular among
pension funds is direct loans to infrastructure projects, with
lending to businesses for exports, mergers or other projects
amidst the banking drought also on the agenda.
In a major move, APG, asset manager for Dutch civil service
pension fund ABP, the largest in Europe, plans to allocate 2-3
percent of its 314 billion euro portfolio to inflation-linked
loans in infrastructure, utilities and other corporates.
It made its first ever inflation-related loan for a local
road-building project in September.
"We are very interested in doing more of these kind of loans
because it matches the pension fund liabilities and it offers
good risk-return tradeoff," Valentijn Thijssen, senior portfolio
manager in APG's Alternative Inflation team, told Reuters.
"The fact that banks are more and more reluctant to enter
this area does help and makes room for us to come in."
To meet the growing liabilities of an ageing population,
pension funds need to find better returns than the negative
yields offered by core sovereign debt, while sovereign wealth
funds are also diversifying to try to generate more cash.
Both can often afford to make longer-term, less liquid
investments than many other investors.
"What do you do when yields are so low? You can become a
lender," said Dale Gabbert, head of investment funds, Europe and
the Middle East, at law firm ReedSmith, which acts for sovereign
wealth funds including China's CIC.
"What they are saying is: if you buy government bonds or
T-bills you are taking risks too, you can lose capital.
"If you compare that to lending ... where you could be
getting in excess of 10 percent, the risk-return ratio for
holding government bonds versus lending with some security,
quite often to fairly established businesses, looks pretty
attractive," Gabbert added.
The International Monetary Fund estimates that European
banks need to deleverage by at least $2.8 trillion in two years
to shore up their capital bases, leaving ample room for
well-funded investors to step in.
Pension funds are not stepping into the sector as fast as
banks are retreating, industry experts say, but deals are being
struck and interest is growing.
PensionDanmark, which has $23.2 billion in assets, bought a
$250 million loan portfolio from Bank of Ireland in June and has
mandated JPMorgan Asset Management to acquire more
infrastructure loans from banks over the next nine months.
The pension fund, one of Denmark's largest, also struck a
deal last year to make 10 billion Danish crowns ($1.74 billion)
available for the funding of export orders through the country's
export credit agency EKF. The yield for PensionDanmark is
100-150 basis points above government bonds, the fund said.
"As pension funds, we are challenged by very low interest
rates on government bonds and equity markets are very volatile
and unsecured," said PensionDanmark's CEO Torben Moeger
Pedersen. "So we are in search of assets that provide us with
substantially higher yield than government bonds without having
to take on the risk on equity markets."
He pointed to opportunities opened up by U.S. and European
banks seeking to reduce the share of capital intensive long-term
loans from their balance sheets.
Bank deleveraging also brings opportunities for asset
managers dealing with big ticket investors who do not
necessarily have the in-house expertise or staff to make lending
decisions themselves, industry experts said.
"Increasingly, conversations are focused around how pension
funds can exploit the absence of banks and traditional providers
of capital, whether it's direct corporate lending or providing
senior debt into real estate," said Paul Campbell, CEO of Cairn
Capital, which manages over $7 billion.
"Sovereign wealth funds are exploring the same
opportunities. It will become a much more plural community -
there will be banks, sovereign funds, pension funds."
The sovereign wealth fund industry, which manages windfall
revenues for future generations for countries from Norway to Abu
Dhabi, has been hit by the financial and debt crisis and is
turning to lending as part of its efforts to diversify.
"We have a mezzanine fund which is drawing strong interest
from sovereign wealth funds," said Patrick Thomson, global head
of sovereigns at JP Morgan Asset Management. "W hen you're able
to take a five-, seven- (or) 10-year view on those assets there
are tremendous opportunities for higher returns."
Cindy Qu, analyst at Shanghai-based consultancy Z-Ben
Advisors, said some of China's sovereign wealth funds have
started this type of lending operations. "They don't disclose
specific examples but we know they are completing this kind of
lending business through their offshore arms," she said.
SWFs are also investing in real estate and infrastructure.
Chinese fund CIC made its first foray into UK infrastructure
earlier this year, picking up around 9 percent in London utility
company Thames Water.
Sovereign wealth funds do not face the same regulatory
issues in terms of capital requirements as pension funds and
insurers, which makes it easier for them to embark on such
projects, said JP Morgan's Thomson.
Europe's biggest insurer, Allianz, set up an infrastructure
debt team in July to tap growing interest from pension funds and
others, and hopes continuing EU talks about capital requirements
for insurers will facilitate such investments, said Deborah
Zurkow, CIO of Infrastructure Debt at AllianzGI.
"Regulators have become very aware of this shift and are
trying to adjust their regulations, she said.
Boosting pension funds' direct lending may take longer in
countries such as Britain, where the government's new "funding
for lending scheme" aims to boost loans to businesses, said
Graham Neilson, investment strategist at Cairn Capital.
"There's more prevalence of investing in infrastructure
projects. It is more of an established asset class so it takes
less time to set up investment processes, whereas direct lending
has traditionally sat with banks," Neilson said.