Investors favour indirect exposure

European limited partners see value in fund manager relationships but finding the right partners in a such nascent market can be a challenge, industry participants at PDI's Germany Forum said.

A poll revealed that around three-quarters of investors at the event favoured exposure through fund investments. Hans-Peter Dohr, founder and managing partner of investment advisory firm ICA, noted that indirect investments – via established funds or funds-of-funds – are a preferred route for Europeans investing in the US market.

“European fund managers have not gone through a very big downward cycle so the asset class is not tested in Europe, so the majority of the market is still in the US,” he said. “If a German insurer wants to invest there, it needs to go indirect because they would not be able to select and monitor US fund managers.”

Panellists agreed that finding good managers, particularly in niche strategies, was a challenge. The upshot is an increasingly bifurcated market where capital gravitates to the largest managers.

Dohr said: “There are good groups that consistently deliver results but what we see is that, because the asset class is so new, there is a tendency to use a classical manager selection criteria to go to brand name multi-managers.”

His comments were echoed by Harald Eggerstedt, a senior consultant at Willis Towers Watson, who said investors just starting to invest in private debt also face a “dilemma” when selecting managers as there are so many new entrants.

“The due diligence is really tough so many will buy the established brands which makes sense, because track record is obviously important,” he said. “There are a lot of new players coming in with interesting products but very little track record.”

But not all European investors are taking the indirect route. Speaking on the topic of direct investments, Dimitar Lambrev, who is a senior portfolio manager with UNIQA Capital Markets overseeing the firm’s global infrastructure debt activities, noted that several insurance providers were doing direct deals.

“In Germany there is a small number of investors, specifically insurance providers, that have decided to set up their own teams to originate, source and underwrite credit within the jurisdiction,” he said.

However, he added that the ability to do direct deals was limited to big players with the internal capabilities and resources needed to manage those investments. Dohr added that these companies were using direct deals as a means of getting exposure to infrastructure debt, which is often seen as a more stable asset class.

He said: “Because of the various low spreads, it almost not possible to go indirect because the cost of the managers are too big; it is more of a feature of the asset class that insurers need to go direct.”