André Haagmann, Head of the Institutional Clients Segment

Alternative investments can hold attractive revenue possibilities for investors.

The changing face of institutional investment 

The low interest rate environment presents a challenge to many investors. They are looking for investment opportunities that offer the possibility of adequate returns with manageable risks. Change of focus: Investors are increasingly turning their attention to alternative asset classes. 

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“At the latest since the onset of the Covid-19 pandemic, it has been clear that the low interest rate environment would persist over the long term,” says André Haagmann, Head of the Institutional Clients segment. “This means investors will have to move further up the risk ladder in search of revenue opportunities. Alternative investments, as well as the internationalisation of investment and active selection of securities, can provide an answer to this challenge.” A look at the figures shows that German investors’ assets under management in alternative asset classes increased by 27.3 percent between 2018 and 2019 alone (source: Preqin, Greenwich Associates, Funds Europe, BAI, Casey Quirk analysis). 

“Investors should broaden their horizons” 

Bernhard Kraus, Head of Cooperative Clients and SMEs, confirms the change in investment behaviour based on his collaborative experience in this field. “The yield on risk-free government bonds will remain well below the long-term average. New sources of revenue are therefore in demand. At the same time, however, it is important to spread risks out widely in order to avoid cluster risks. It is therefore important for investors to include many different asset classes in their overall allocation.” At the same time, investors should broaden their horizons. “Strategies involving non-interest-bearing investments in shares and alternative investments, such as private equity, private debt, infrastructure and real estate, can form part of a balanced risk mix. What exactly this looks like varies from client to client. We are happy to provide guidance on this. Nearly all our clients who maintain a broad asset allocation and reacted prudently during the pandemic emerged from the crisis unscathed.” 

Strategies involving non-interest-bearing investments in shares and alternative investments can form part of a balanced risk mix. What exactly this looks like varies from client to client.

Bernhard Kraus

Head of Cooperative Clients and SMEs

 

Important revenue component for long-term own-account investing

However, investors take on long-term obligations when they invest in alternative asset classes such as private equity, private debt and infrastructure investments. This is because alternative investment managers do not normally invest the capital commitments they receive within a short period of time, but instead spread targeted investments out over various investment cycles, regions and sectors. “Right now is a good time to invest,” says Bernhard Kraus. “This is because although some businesses have been hit hard by the effects of the pandemic, they have significant potential to recover, for which they need capital. In addition, we expect even greater private financing of infrastructural measures in the future. Investment vehicles such as these can be important income building blocks for long-term own-account investing.”

Superior services set us apart from the competition

In addition to investment management, reporting also plays a major role for investors. “We act as a service capital management company for our clients. This means that we work together with the client to determine which forms of investment are best for them, select the appropriate partners and manage them. At the same time, we take care of all the reporting involved. The superior quality and scope of our service in this area sets us apart from the competition. The concept has proved its worth over many market phases,” says Kraus.

Step-by-step expertise development

Union Investment has continued to develop its management expertise for alternative investments over the years. “For example, our investment in the private debt manager aam2cred marks our entry into another area that can offer an appealing solution to institutional investors in the current environment,” says Haagmann. Private debt is one of the biggest growth markets in asset management. “We therefore now have a high level of expertise in mezzanine and whole loan financing and are expanding our range of products and services in alternative investments for institutional clients.”  

Mezzanine debt

Mezzanine debt is the “classic” subordinated loan with a fixed two-digit interest rate. An impressive feature of this form of financing is its simple contractual structure. It is a form of financing that is preferred for predictable investments. 

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• Suitable for predictable investments 
• Predictable financing variant 
• Conventional contractual structure includes simple capital and interest structures 
• Financing of approximately 5–20 percent of an investment

Whole loan

Whole loans are used as a means of efficiently combining senior and mezzanine loans. This form of financing makes it possible to offer borrowers a one-stop financing solution that significantly reduces exercise risk. This solution is more efficient than combining traditional senior and mezzanine approaches.

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• Suitable for investments that can be assessed easily
• The most efficient one-stop financing solution 
• Lower financing/reconciliation complexity 
• Single-digit blended interest rate 
• Financing of up to 85 percent of an investment 

Clients reward the development of expertise

The combination of outstanding service performance and the systematic development of expertise has met with widespread approval from institutional clients. This has been reinforced by the continuous growth in these asset classes in recent years. “Our goal is to offer our clients high-quality solutions tailored to their needs. This is why we strive to expand our expertise in the future while keeping a close eye on our clients’ requirements,” says Haagmann.

Our goal is to offer our clients high-quality solutions tailored to their needs.

André Haagmann

Head of the Institutional Clients Segment

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