In-house investment and alternatives: How Germany’s WPV sets itself apart

Versorgungswerk der Wirtschaftsprüfer (WPV), the industry pension fund for some 17,000 auditors and certified accountants in North Rhine-Westphalia in Germany and one of the country’s largest professional pension institutions, stands out amongst peers for its in-house investment management and the fact that half of its €6 billion ($6.9 billion) portfolio is invested in alternatives.

WPV’s appetite for risk, diversification and efficiency is a direct response to the increasingly challenging climate for Germany’s voluntary, occupational pension schemes which compete for beneficiaries and savings with the country’s mandatory pension insurance system, into which all employees must contribute.

It also underscores the investor’s determination to boost returns and create a sustainable pension fund against the backdrop of demographic changes and declining contributions relative to the number of pensioners in the fund.

“To ensure a sufficient increase in entitlements and pensions in the long term, the return on investment is becoming increasingly important,” Sascha Pinger, managing director at WPV, tells Top1000funds.com in an interview.

WPV established its own regulated advisory and asset management arm in 2023, tasked with in-house management as well as rigorous external alternative fund manager selection and advisory, drilling into managers’ investment processes, risk management systems, and the consistency of their implementation.

“While many pension funds still rely heavily on a traditional ‘buy’ approach when it comes to asset management expertise, WPV has pursued a ‘make’ approach for many years and made an early decision to strategically develop key competencies in-house,” he says.

Having an in-house asset management and advisory business has particularly supported diversification, he continues. WPV can better sidestep concentration risk, protect the overall portfolio against fluctuations and optimise return potential. The internal team also ensure the strategic asset allocation is subject to continuous monitoring and ongoing risk measurement and management.

“For us, it’s not just the formal allocation that’s crucial, but also understanding the underlying risk drivers. We analyse correlations, cash flow profiles, and stress scenarios at the overall portfolio level and ensure that individual components reflect different economic factors. This is how we ensure the portfolio remains stable even in challenging market phases.”

Illiquid investments: real estate focus

Illiquid assets make up around 50 per cent of the total portfolio, comprising real estate, private equity, private debt and infrastructure, where investments include digital and transition infrastructure, and assets benefiting from government support programs. Strategy across alternatives is characterised by diversified investments in indirect vehicles and rigorous manager selection, he says.

“When selecting partners, we pay particular attention to demonstrable track records, local presence, and a strong alignment of interests, for example, through substantial co-investments by the managers.”

Around half of the illiquid allocation (25 per cent of the whole portfolio) is invested in real estate, an allocation that has been battered by working from home and rising interest rates. Higher rates have fundamentally altered valuation methods, hiked financing conditions and hit transaction volumes, he says.

For example, he notices that many projects have become economically unviable. It’s led to a wave of project developer insolvencies, particularly in the office sector, where increased construction costs, falling sales prices, and lower debt-to-equity ratios converge.

“Many ongoing projects have been halted or delayed, and institutional investors must critically review their investments and partnership structures. Financing costs have increased significantly, making many projects economically unviable,” he says.

Alongside deliberately reducing its office sector holdings, WPV is only pursuing value-add strategies “very selectively” and he says real estate investments in the US are also “on hold.”

But Pinger still sees high strategic value in real estate given its long-term stability and inflation protection.  A key to success, he says, is the right management where internal expertise gives an edge. It particularly supports WPV’s direct real estate holdings, enabling the investor to simplify the management of a complex portfolio with diverse assets in a rising regulatory environment.

Strategy is shaped around direct and indirect investments plus active portfolio management targeting development opportunities. The portfolio has a European bias focused on sectors like food-anchored retail properties and residential that give stable cash flows in structurally robust locations.

In another positive, he says the fund is planning to expand its allocation to “established investment markets” in Asia.

In private equity, he notices more exit opportunities for LPs emerging via continuation vehicles which give existing investors a choice to cash out or reinvest in the new vehicle alongside secondary investors.

WPV only “very selectively” invests in private debt. He reflects that the asset class can make a stabilising contribution in certain market phases but at the same time requires rigorous quality and risk assessment.

“Our focus is broad diversification and carefully structured investments,” he says.

In public markets, ongoing themes include steadily building back the fixed income allocation (currently at 33 per cent) in response to higher interest rates.

“In 2022 we began reversing a trend that had been in place since the GFC. Historically low rates led the fund to steadily move away from fixed income into more illiquid assets.”

Higher interest rates have also shifted the team’s emphasis back to duration management, particularly navigating the short-term impact of structural market uncertainties on liquid markets. Things, he explains, like geopolitics, interest rate and inflation volatility, concentration in leading equity indices, and liquidity and spread risk in fixed income.

“We see both opportunities and the need to manage risks from rapid and erratic political decisions that can have a significant short-term impact on liquid markets. In such phases, it is crucial to strategically leverage market disruptions and maintain a clear head.”

Longer-term, the trends he is most focused on include integrating the increasing fragmentation of capital markets, digitalisation, and climate-related risks – a large portion of WPV’s investments meet the EU’s Article 8 standards on sustainability – into the investment process.

“Our goal is to create a robust, transparent, and long-term oriented portfolio that is not dependent on short-term market movements but rather contributes consistently to the overall return of the WPV,” he concludes.