German LPs ripe for private debt allocation

Advisors speaking at the PDI Germany Forum noted German investors should be a target for debt funds. These investors, however, require further educating before their allocations become substantial


German institutional investors should be a target for debt funds due to their traditional investment preferences and goals, according to a panel speaking at PDI 's Germany Forum . Despite this, investors in Germany are less familiar with the asset class and require further educating by fund managers and advisors.

While debt funds may struggle to originate deals in Germany, largely due to the substantial banking presence, they shouldn't overlook the potential of German-based investors. “It's more a credit country than an equity country if you want to describe it as this,” said Tobias Ripka, principal at Mercer.

Ripka added German investors favour fixed-income, are naturally cautious and don't necessarily need to see double-digit returns from every asset class – factors that seemingly would make private debt a suitable investment. The market, however, is behind other European countries when it comes to understanding these types of investments.

“When I talk to German investors the discussion takes two to three hours and they still struggle to get it,” Daniel Heine, managing director for private debt at Patrimonium, noted. He added German investors with allocations to private debt also sometimes assess these in an incorrect manner.

“In Germany there is a focus on returns, which is the wrong focus if you want to invest in credit,” Heine said. “You want to focus on risk.”

Ripka also noted allocations to the asset class from German investors are small at the moment. Part of this is due to investors replacing alternative investments with private debt, rather than carving out sleeves from their fixed-income portfolios. “As long as you talk about the alternative allocation it will be a small portion,” he said.

Such small allocations may be underselling the asset class, Ripka added. “An allocation of 1 percent doesn't make sense at all,” he said, also noting this is close to the average allocation German investors are making to the asset class. “It's not moving the needle.”

Ripka noted he advises his clients to make an allocation of 5 to 10 percent of their portfolio to the asset class.