The investment of Spanish insurers and pension funds in private equity is significantly lower than that of other geographic areas and institutions. This is what Ignacio Serra, Associate Director of BCG, said when presenting a company study on the potential of private equity for insurers and pension funds in Spain, as part of a seminar organized by ASCRI (Asociación Española de Capital, Crecimiento e Inversión — Spanish Venture Capital & Private Equity Association).
According to the analysis, in addition to having lower levels of investment in Spain compared to other geographic areas, private equity investments also diversify significantly outside of Spain. This makes the private equity sector highly dependent on investment from international managers.
The presentation of the report was followed by a round table moderated by José Luis García Muelas, CIO of Loreto Inversiones, on the appeal of this asset type, which, among other advantages, offers an interesting differential risk profile for the investor because of its particular discorrelation with the economic cycle. Until now, Spanish fixed income had offered a high return and the regulation of pension plans and funds did not favor this type of investment, instead discouraging it or limiting it in volume.
In Spain, there are different types of investors who invest successfully in this alternative asset type — a valid and attractive investment strategy. Experts believe that investors will be further encouraged by the current low interest rates; the growing interest of national insurers; the new regulations, which will have positive effects on medium- and long-term pensions; and the expectation that Solvency II could favor this kind of investment.
Capabilities required to invest
María Concepción Bravo, Fixed Income Portfolio Manager at MAPFRE AM, highlighted that there are two ways to proceed: to develop the company’s own asset management capabilities, which is impossible to achieve for all existing assets, even for a company like MAPFRE, or to look for specialized front-line managers. In her view, “It’s not about reaching all assets; it’s also useful to associate and co-invest with good partners.”
MAPFRE has different work groups in private debt, private equity, real estate and infrastructure, with specific approaches to the different investment strategies. Taking the latter as an example, the insurer joins a player like Macquarie in a fund close to 300 million euros, in which MAPFRE has a stake of over 100. Last week, it announced a partnership with Iberdrola for an investment in renewable energy—also 300 million—to generate 1,000 MW in Spain.
The expert also shared interest in projects such as the private equity fund set up with Altamar. It is a highly diversified product of continuous investment, with the aim of achieving a mature portfolio that is capable of self-financing.
As for private debt, MAPFRE has chosen to develop its capability internally; it manages its portfolio directly, given the similarity and experience of traditional assets in its portfolios (almost 90 percent in fixed income) and the advantages offered by credit, which enables diversification, not only geographically, by years or by managers, but also by subordinated tranche. Depending on risk appetite, debt will be positioned in a senior tranche (tranche with lower risks and returns) up to the mezzanine tranche, passing through the unitranche, with all its nuances.
The commitment to ESG gains prominence in the post-COVID era
Private equity is an asset that is “here to stay” with Spanish insurers and pension plans. According to the MAPFRE AM expert, it makes them feel comfortable “given its merits and, given market circumstances, it is a good alternative.”
The market situation, impacted by uncertainty and relocation during the pandemic, has caused those who so far lacked this type of investment to demand it, and those who, like MAPFRE, had already adopted it, to increase their weight in portfolios.
The significance of the ESG concept (investments with criteria that are eco-friendly and respectful of society and governance) has led this asset type to be well ahead of liquid investments right now. The criteria that support it are based on three elements that carry a lot of weight:
- Conviction: Focusing investment on measures that have an impact.
- Enforcement: Current regulations are promoting sustainable investment, which will increase.
- Convenience: Clients are going to demand this kind of investment.
MAPFRE’s ESG strategy is inscribed in its DNA. MAPFRE AM was the first fund manager to receive the prestigious French ISR label for two funds (Capital Responsable and Inclusión, respectively), and its methodology and strategy in this area were underpinned by the acquisition of 25 percent of La Financière Responsable. In the future, the goal is to continue closing high-impact investments, such as Global Social Impact (short- and medium-term funding for development projects in Africa).
“We are very involved.” After all, the average life of these investments is around ten years. They are very long-term; for these investments to succeed they need to have a real positive impact.