In the latest development of its private market portfolio, Swiss pension fund PUBLICA is investing in infrastructure equity in a partnership with three other Swiss pension funds and Dutch pension investor APG.
Private markets now account for 30 per cent of PUBLICA’s CHF40.5 billion ($46.6 billion) portfolio in an allocation that has been steadily built out since 2015 when the pension fund’s only real asset was an allocation to Swiss real estate.
Since then, risk has been added incrementally via an allocation to investment grade long-term private debt and foreign real estate. A 3 per cent allocation to infrastructure equity was added in 2022 to boost returns and add diversification divided equally between three open ended funds – and the latest allocation via partnerships.
“As we progressed through private asset classes we have added risk,” explains Dominique Gilgen, who joined the pension fund in 2015 to help build up private markets and now oversees a team of three in line with the portfolio’s growth. “At the same time, we have developed our experience, competence and confidence with these asset classes and vehicles.”
Although infrastructure equity brings higher risk, Gilgen believes in volatile markets it will be relatively stable given its long-term cash flows and the fact it sits in a more conservative space than equity. He also likes the inflation protection and ability to integrate ESG.
“Infrastructure equity has attractive characteristics from a sustainability point of view. It fits well with PUBLICA’s responsible investment approach and positive selection criteria are easier to integrate.”
Private equity remains notably absent from the real asset allocation. Equity risk, explains Gilgen, has always been the biggest risk in the portfolio (the listed equity allocation is 32 per cent of AUM) and the fund has been reluctant to go into an illiquid asset class with a risk factor that will build on existing risk.
Other concerns include how to efficiency implement private equity and high fees. He lists transparency, investor influence and the possible misalignment of interests as other issues.
“It is more difficult to access private equity and get compensated for the additional risk. For us, whether or not private equity can deliver risk premia after fees remains a question.” In 2023 PUBLICA’s total asset management expenses were 0.22 per cent.
Partnership in action
PUBLICA’s partnership with Swiss funds City of Zurich, Kanton Aargau, and Credit Suisse together with Dutch pension investor APG targets an initial commitment of €1 billion to jointly gain access to global infrastructure in the private market space. The quintet, hailing the collaboration as a benchmark for cross-border pension fund partnerships emphasize stability, transparency, and a long-term vision and hope to make the first investment “in the coming months”.
PUBLICA’s previous experience of partnerships includes collaborating with US insurance companies in private debt where stakes include real estate debt, infrastructure debt and corporate private placements. US insurance companies act as both asset manager and co-investor, typically contributing over 50 per cent of the investment, he explains. Gilgen particularly likes the alignment of interest in the active allocation that such a partnership brings.
He hopes the partnership with APG, which has a long track record of investing in private infrastructure and an experienced, large team, will bring another opportunity to learn. “We are partnering with someone who has vast experience in this area and capability to do this investment,” he says.
The partnership has been structured to incorporate differences between Swiss and Dutch legal and tax frameworks. He says the investors share many similarities including values and philosophies.
“The relationship was strong before we started. Although we are five distinct pension funds we have a common understanding that has helped bring such a project to a successful start.”
