EXECUTIVE SUMMARY Green light for growth Germany 2015 institutional investment management market report September 2015 6, rue Lincoln - 75008 Paris - France - Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu
Confidentiality CONFIDENTIALITY The asset management industry is highly competitive. INDEFI provides its clients with qualified market data, information and analyses, with a view to help them develop successful business development strategies and build sustainable competitive advantages. In turn, our business is highly competitive. We expect our clients to protect our interests and intellectual property. All information provided in this document is proprietary to INDEFI, unless otherwise specified. Under no circumstances should this document be shared with any third party without the written consent of INDEFI. Copyright 2015 INDEFI 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 2 / 11
Executive summary EXECUTIVE SUMMARY The German institutional market is the largest in continental Europe with ~ 2,500 bn in managed assets. It has been growing healthily on the back of the strength of the local economy. While it has traditionally been perceived as challenging for international asset managers, recent market trends indicate that there are new opportunities to be seized. The main objective of this report is to highlight these evolutions. The healthy economic environment, resulting in increasing wage levels, lower unemployment rate and thus higher contributions to second-pillar pension schemes. In the other institutional segments, net inflows have been lower, yet positive, mirroring the growth rate of the German economy; Increasing asset management outsourcing rates resulting from wide-scale adjustments to institutional allocations. A 400+ bn market opportunity growing at a steady rate Based on institutional data reported in our panel 1, we compute the third-party delegation market at 322 bn at the end of 2014. 2011-2014 CAGR +7% 1,769 bn 1,448 bn Since the end of 2011, the competitive market has thus increased by +14% per annum, almost twice the overall asset growth rate over the period. Total third-party delegation can be extrapolated to 405 bn, taking into account all the institutional market. Growth in the institutional market derives from several factors: Investment performance, which has been particularly strong in the main asset classes used by institutional investors (fixed income and European equities); 218 +14% 322 2011 2014 Delegation rate 18% Extrapolation: ~ 405 bn market opportunity Figure 1 - Growth of the third-party institutional market. 1 The 2015 INDEFI panel covers 241 institutions managing ~ 1,769 bn for their own account excluding strategic participations - Beteiligungen, i.e. 73% of the overall institutional asset base in Germany (and 86% not taking into account banks Depot- A investments). 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 3 / 11
Executive summary The interest rate windfall: how the zero yield environment fuels third-party asset management Multi-asset strategies have gained ground in institutional portfolios and are expected to keep growing; As in other European markets, the major challenge for German institutions has been the adaptation to the zero yield environment. This is all the more critical as most of them (pension institutions and insurance companies) are faced with providing guaranteed returns to their beneficiaries and policyholders. Alternatives (including Newcit -type absolute-return investments) have steadily increased, driven by pension institutions (and to a lesser extent large insurance companies). Adaptation to this atypical financial environment has translated into the following asset allocation adjustments: Institutions have diversified and are more actively managing their fixed income investments. A first adjustment has been to move down the credit curve to investment-grade corporate paper, high yield and emerging markets debt. This wave is behind us as investments in these areas have probably been stretched to the limit and appeared less appealing over the past 24 months. Investors are now reallocating their portfolios to new areas of the bond world with a strong focus on international fixed income (in particular, US and Canadian rates and credit) and, to a lesser extent, total-return credit strategies. It remains to be seen whether the mania for private debt (i.e. loans and private placement) takes hold in Germany as fast as in other European countries (France, the UK, now Italy), in a country where investors are renowned for their prudent approach and constrained by hampering regulations; Real assets arouse real interest. This is particularly the case of infrastructure investments. Even though allocations have increased in this space, driven by large insurance companies, there still seems to be more talk than action at the moment in the rest of the market for lack of regular investment opportunities and of a favourable regulatory framework; Third-party delegation market Multi-asset Infrastructure Private equity Real estate Alternatives Equity Fixed income diversification Traditional fixed income Figure 2 - Structure of the third-party delegation market by asset class. 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 4 / 11
Executive summary New opportunities for third-party asset managers All these asset allocation evolutions have played in the hands of thirdparty asset managers, as institutions seldom possess the required skills and market access to directly manage these investments (an obvious exception being large insurance companies which often own affiliated asset managers). Success for asset managers in the German institutional market still relies on their ability to master the regulations and play by the local rules. This is epitomised by the weight of special AIFs (formerly Spezialfonds), which still represent ~90% of the third-party delegation market. Yet, things are slowly changing: Our analysis shows that this market is rapidly changing on the back of wide-scale adaptations to the macro-economic environment, offering new business development opportunities. We are looking forward to sharing and discussing with your teams the key take-aways of this market report. Paris, 31 st August 2015, Solvency II, creating a homogeneous framework for insurance investments, implicitly ushers in a competitive level-playing filed in the insurance outsourcing business, provided asset managers demonstrate their understanding of the regulations, adapt their offering and deliver impeccable client services (e.g. reporting reactiveness and line by line portfolio transparency). As there remains uncertainty on the subsidiarity principle between Solvency II and Novelle des VAG, asset managers cannot ignore local regulations; Richard BRUYERE Managing Partner Daniel KÜTHER Senior Consultant The rush towards real assets translates into investments in closed-end vehicles. Here again, it will be necessary for thirdparty asset managers to adapt their market approach as investors tend to use advisors and consultants for allocating to these asset classes. For third-party asset managers, the stakes are high in the German institutional market, due to its sheer size and favourable dynamics. 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 5 / 11
Objectives and methodology OBJECTIVES AND METHODOLOGY The objective of the 2015 institutional investment management market report is to provide asset managers with an in-depth analysis of the competitive opportunity in the German institutional market. The competitive opportunity is defined as the share of financial (and real) assets managed by third-party asset management companies on behalf of institutional investors. This report provides a segmentation of the client base, an evaluation of the pool of accessible assets for third-party asset managers and an analysis of key market trends. Development opportunities for asset managers are systematically analysed and quantified. The research is based on the proven INDEFI Market Research methodology (15-year track record in analysing asset management outsourcing markets). It relies on both quantitative and qualitative inputs obtained from public sources and high-level interviews with key investment decision-makers at major institutions. In addition, market experts and asset managers were also solicited to contribute to our analysis. Scope of the report The report covers the largest institutional investors in key market segments. According to the INDEFI definition, institutional investors encompass all institutions that manage assets for their own account on a long-term basis (so-called asset owners ). The following investors are covered in the report: Pension institutions, including corporate and commercial schemes, independently from the pension delivery vehicle 2, pension plans for the self-employed and civil servants; Insurance companies 3 ; Savings and cooperative banks for Depot-A investments; Non-profit institutions, including church-related institutions (church treasuries, clerical banks) and pension schemes, as well as foundations. The following investor segments are not covered in our analysis: corporate treasuries and long term reserves (including assets held against nuclear power plant decommissioning liabilities) and quasiinstitutional segments such as mid-size corporate holdings (Mittelstand companies) and family offices. 2 Contractual Trust Agreements, Pensionskassen, Pensionsfonds, etc. 3 Assets related to multi-employer commercial pension schemes (e.g. Pensionskasse, Pensionsfonds) promoted by insurance companies are reported in the pension institutions segment. Corporate pension assets covered by insurance contracts (Direktversicherung) are reported in the insurance segment for the purpose of our analysis. 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 6 / 11
Objectives and methodology Third-party asset management market in Germany and scope of the research report Third-party asset managers Out of scope Occupational pension schemes Corporate schemes* Commercial schemes Pension institutions Civil servants / liberal professions Versorgungs -kassen Zusatzversorgungs -kassen Insurance companies Banks (own accounts investments) Non-profit institutions Distribution Independent financial advisers (IFAs) Insurance companies (unit-linked investments) Multimanagers Online distribution Private banks Retail banks RIAs / Family Offices BaFin supervision (partially VAG) Länder supervision (VAG) BaFin supervision (Solvency II, VAG) BaFin supervision (Basel III) (**) Institutional investors Notes: * Corporate schemes include mono- and multi-employer schemes, whereas commercial schemes are mostly affiliated to insurance companies; ** No investment constraints apply to Church and foundation investors, but for the Church pension institutions included in this segment. Figure 3 Scope of the 2015 institutional investment management market report. 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 7 / 11
Objectives and methodology Scope of investments analysed Most of the collected assets under management figures date from year-end 2014. They are reported on the basis of their mark-tomarket values (Zeitwerte). For the purpose of our analysis, institutional investments include all assets on investors balance sheets, excluding: Strategic participations 4 (Beteiligungen), and operating property; Unit-linked investments on insurance companies balance sheet, which are covered in our analysis of the German distribution market 5. All investments in financial and real (real estate, infrastructure) assets are analysed in the report. Convertible bonds (Wandelanleihen) are normally not reported separately but aggregated under fixed income; In this report, alternatives include investments in off-shore hedge funds, so-called Newcits and other absolute-return vehicles, as reported by investors. They do not include investments in real estate, private equity and infrastructure, which are reported separately. Third-party asset management market data computation methodology Third-party asset management figures exclude direct (on-balance sheet) investments carried out by institutional investors themselves, assets delegated to intra-group / affiliated asset managers and strategic partners, and money entrusted with banks (cash deposits, structured products, collateral for derivative positions). Institutional investors (e.g. insurance companies) owning a majority stake in an asset manager qualifies as group delegation; Strategic partnerships are defined as relationships between institutional investors and asset managers where usual competitive rules do not apply. They include institutions holding minority stakes in asset managers, bancassurance - type partnerships (when assets gathered through the bank distribution network are systematically delegated to the bankowned asset manager), savings and cooperative banks delegation to their Group-affiliated asset manager, and longterm business relationships resulting in so-called sticky assets unlikely to move. When assets are delegated by an institutional investor to an affiliated multi-manager, the fund of funds assets are considered as group delegation for the purpose of analysing the accessible market at investor level. It was not possible to retreat on a look-through basis the share of external products subscribed by the affiliated multimanager on behalf of the institutional investor. 4 Including equity stakes held by foundations in their historical sponsor company. 5 Please refer to INDEFI Market Research, The new pillars of open architecture, November 2014. 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 8 / 11
Objectives and methodology Similarly, investments in UCITS (including ETFs) held by institutional investors in special AIFs have not been reported. The overall accessible institutional market opportunity for thirdparty asset managers is thus slightly under-estimated. Asset management products and services analysed The report primarily focuses on the following third-party asset management products: Segregated institutional funds: special AIFs; Other segregated delegation formats (including wealth management and advisory mandates); Closed-end funds (mainly in private equity, real estate and infrastructure); UCITS (Publikumsfonds), including exchange-traded funds (ETFs). The following are also tracked down and highlighted whenever significant in the analysis of a given client segment: Structured products and derivatives; Bank deposits (for cash balances). 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 9 / 11
Objectives and methodology Panel of the report The panel of the 2015 report comprises 241 institutional investors. Segments # % In addition, interviews were completed with market experts (investment consultants, ESG rating agencies, B2B platforms, Master KVGs, professional associations and official bodies) by the INDEFI team in the preparation of this report. Occupational pension schemes Corporate schemes 48 20% Commercial schemes 11 5% We would like to thank all participants for their valued contribution to our research project. Civil servants/liberal professions Versorgungskassen 14 6% Zusatzversorgungskassen 10 4% Insurance companies 1 71 29% Banks 29 12% Non-profit institutions 58 24% Total 241 100% The detailed list of institutional investors in the INDEFI panel is provided in the Appendix. 1 Belonging to 58 insurance groups. 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 10 / 11
Germany 2015 institutional investment management market report INDEFI is an independent strategy advisory company specialised in the asset management industry (including private equity, infrastructure and real estate). Our mission is to help our clients make the right decisions so that they can meet their growth objectives and successfully implement their business development strategy. We provide our clients with fact-based and quantitative market analyses, which systematically underpin our strategic recommendations. Our strategy advisory activities rely on proprietary data sourced by our dedicated market research business unit. INDEFI Market Research has 15 years of experience in providing market intelligence services to third-party asset managers. We provide insights into the key markets and investor segments that our clients address: Asset owners / institutional investors (pension funds, insurance companies, bank own accounts, foundations and endowments); Corporate investors (treasuries, employee saving and pension schemes) ; Wholesale fund buyers and sellers, platforms ; Retail investors through distribution networks. We focus on all European markets and maintain an ability to conduct research around the globe. Based in Paris, France, we are a team of 20 dedicated consultants with seasoned experience of the asset management industry. * * * For additional information, please feel free to contact: Richard BRUYERE Daniel KÜTHER Managing Partner richard.bruyere@indefi.eu Senior Consultant INDEFI 6, rue Lincoln 75008 Paris, France Tel: + 33 (0)1 5688 3470 Fax: + 33 (0)1 5688 3471 daniel.kuether@indefi.eu 6, rue Lincoln - 75008 Paris - France Tel: +33 (0)1 5688 3470 - Website: http://www.indefi.eu Email: richard.bruyere@indefi.eu 11 / 11