German church pension: We’ve needed to think outside the box

KZVK & VKPB, a €14bn pension based in Dortmund, has had to come up with creative ways to source private equity opportunities due to its location.

KZVK & VKPB, a €14 billion German church pension fund based in the western city of Dortmund, has had to come up with creative ways to source private equity opportunities due to its location.

The fund, which also supports the retirement of the clergy, medical and educational professionals, has invested in private equity since 2000 and began its exposure to the asset class via separately managed accounts. In 2017 started sourcing investments directly. Its internally sourced portfolio represents around half of annual commitments. The pension has a 13 percent target to private equity, which currently stands at 4 percent.

Private Equity International caught up with Byron Beene, a senior portfolio manager at KZVK & VKPB, to find out more about how its portfolio has fared amid the health crisis and its allocation plans in the near-term.

How have your priorities as an LP recently changed?

Pre-covid-19 we spent a lot of time researching various segments in the alternative space. We classified many opportunities as “interesting – but not at today’s price”. Two that we are now reviewing are special situations/distressed and industrial real estate.

How has your portfolio fared in the recent environment? 

There are only a few of names we have concerns for. This is in part due to luck and also by design. The luck is that the downturn did not happen later, allowing many of our GPs to remain largely uncommitted. About design, our market cap and sector exposures have been an enormous help.

We started co-investments last year. One is a chronic disease generics pharmaceutical and the second is an online retailer of consumer staples. For the former, covid has had no impact; for the latter, it’s doing better than expected. Both deals were done with GPs for whom we represent a large percentage of AUM – agency problem solved.

How are you conducting due diligence given the travel restrictions?

We are doing all the desk work including numerous calls with the GP and the 15-plus reference checks with LPs, competitors, CEOs of invested companies, brokers and others ideally not on their reference list. We hope travel restrictions will be lifted shortly. Otherwise, we would likely do video on-sites. As we do so much desk work prior to the on-site, the on-site has historically rarely led to deal stop.

Has your location affected how you source investments?

As Dortmund is not an LP hub, we’ve needed to think out of the box to maximise our sourcing efforts. In addition to standard sourcing methods of databases, conferences, PAs and GP reference calls that we always use to exchange ideas, we have also started a global LP forum composed of family office investors. We regularly discuss workflow and recent GP meetings. We even share the work of mapping out new investment verticals.

Tell us about the investment strategy of your internally managed portfolio.

The internal strategy accounts for both market valuations in 2016 and the segments not covered by our SMAs. Given market valuations, we decided to drive a very defensive strategy. We chose not to invest in the following: large/mega-cap PE, late-stage venture/growth, medium/large cap secondaries, GP stakes, PE real estate, and any highly leveraged strategy. Additionally, we stayed away from strategies that invested heavily in cyclical sectors, including the three Fs: fuel, fashion and furniture.

What types of investments do you focus on?

We focus on highly specialised small-cap (emerging) managers and less correlated niche segments. Historically, small-caps outperform larger caps in downturns due to less leverage, lower entry multiple and less dry powder. Our less cyclical strategy led us to healthcare and tech/digitisation.

The niche bucket leads us to GPs with quicker DPIs, less institutional following, less leverage, and less cyclical exposure. We reviewed many strategies, from aquaculture to life insurance settlements but didn’t invest in most for multiple reasons. Some investments we made included several tech/SaaS funds, niche secondaries, healthcare funds (including pharmaceutical development funds) and buyout funds of founder-led companies.

Will you continue the defensive tilt in the current market environment?

Both the velocity and direction of numerous economic indicators is unprecedented. The second and third order effects are unknown. We will continue allocating to sectors less affected by the current environment. We are also considering preferred equity structures with high asset coverage ratios.