German investors shift their attention to private markets

German institutional and high-net-worth investors are increasingly turning their attention to the private markets space, with a specific focus on private equity and private debt.  

German institutional and high-net-worth investors are increasingly turning their attention to the private markets space, with a specific focus on private equity and private debt.  

Raphael Schwartze, Investment Manager at FAROS Consulting (FAROS), told Private Equity Wire that historically, German investors have focused their ‘alternative’ allocations on real estate, both through real estate funds and direct investments, and less on other private market asset classes.  

However, in more recent years, he said investors have turned to other asset classes too, such as infrastructure and private equity.  

Schwartze commented: “Private market interest in the years to come is probably inevitable. We want to advertise this asset class to institutional investors who in the past might not have had this much exposure.”  

A survey conducted by Bundesverband Alternative Investments (BAI) in 2020 predicted that by 2025, portfolio allocation to private debt and private equity will have almost doubled compared to 2020, with corporate private debt being the asset class that will attract the most first-time investors.  

Meanwhile, a private equity sentiment indicator set up by German investment bank KFW Group rose by 18.7 points in Q1 2021, due to the increasingly positive outlook for SMEs that are often the focus of German private equity investments.  

Schwartze commented that due to the regulatory environment and their background, many of FAROS’ institutional investor clients are more open to private debt investments. In the survey conducted by BAI, 18 per cent of respondents said they planned to allocate to private debt, with credit specialties such as insurance-linked securities and infrastructure equity expected to grow.  

Schwartze added that family office clients are more likely to allocate to private equity. “These clients broadly go into private equity as they are normally coming from an entrepreneur-style background, and so this direction is more appealing. Bigger clients are also going into private equity as well, as the return profile on the long run can be quite attractive,” he said.  

FAROS is an institutional investment consultant, specialising in serving institutional investors in German speaking countries. It advises a client base of professional pension schemes, pension funds, foundations and family offices.  

According to research from the German Private Equity and Venture Capital Association (BVK), German investors allocated over EUR16.6 billion to private equity in Germany in 2019, more than any other year since the 2008 financial crisis. Although 2020 saw a dip in private equity investments, with only EUR12.6 billion invested, in the first quarter of 2021 the sector regained some momentum.