In a world where banks are pulling back from their traditional funding role, there is an ever-growing number of opportunities for asset owners to fill the gaps.
The number of partnerships between asset owners and asset managers has been gathering pace over the past five years and involvement is no longer the preserve of giant pension funds.
In the aftermath of the financial shocks of 2008 large funds decided they wanted more control over their destiny and were also unhappy with fees, according to Luba Nikulina, global head of manager research at Willis Towers Watson.
“The asset owner community became more aware of the overall bias in the structure where most of the value created goes to the asset management industry rather than the asset owners,” she says.
There was also a realisation that a large tailored deal with a fund manager, particularly in the private assets space, made more sense than having an ever-increasing number of manager relationships.
An entry-level deal involves the direct supply of a significant sum of capital for an opportunistic deal at relatively short notice. It often stems from a friendly agreement with a private debt manager.
This helps a fund manager that does not have time to secure a group of smaller investors to provide the same sum and it can also be more appealing than partnering with a rival manager.
The next stage up is a more formal structured deal. Here, the asset owner can often be seen to be taking the initiative, accept more of the risk and have the upper hand.
In October 2016, the New Zealand Superannuation Fund became a significant investor in Boston-based Longroad Energy Holdings, which focuses on the development of wind and solar energy generation in the US.
It followed the 2014 deal between the Californian Public Employee Retirement System (CalPERS) with UBS Global Asset Management to purchase global infrastructure through the creation of a new fund management firm funded with 97% capital from CalPERS and 3% from UBS.
Indeed, for the world’s gargantuan funds, such partnerships are a fact of life. Almost any allocation the C$300bn Canadian Pension Plan (CPP) makes with a fund manager is so large it is best structured as a partnership.
In 2016 it formed these relationships at a rate of one per month; bringing patient long-term capital to the table attracts plenty of willing suitors. One example was a 25% stake worth $375m in the Raffles City China Investment Partners III fund, which will invest in Chinese gateway cities. To help service such deals in the region, CPP has an office in Hong Kong.
It should also be noted that many relationships do not get publicity, especially those between hedge fund managers and asset owners. For some asset owners, managers such as Bridgewater not only offer diversification of returns but detailed and expert advice on macroeconomic issues.
The $7bn question
But can smaller funds do such deals? Andrew Drake, a partner in pensions and investment consulting business at PwC, says that they typically only start to make sense for funds that are over $6-7bn in AuM.
Such AuM constraints leads to regional disparity. Pension funds from countries that have scale take advantage of large funding opportunities in other developed nations where funds lack scale.
The €161bn PGGM fund has 40 years of experience in investing in build-to-rent housing in the Netherlands; the more atomised UK pension fund market does not have an equivalent. So, when Legal and General Capital recently sought a partner to build £600m of flats to rent in the UK in 2016 it turned to PGGM.
Similarly, North American and Swedish pension scheme members will stand to benefit from the deal between the First Swedish National Pension Fund (AP1) and Second (AP2) and TIAA-CREF to create TH Real Estate a pan-European office investment platform committed to building €4bn of offices in London, Paris, Munich, Hamburg, Frankfurt and Berlin.