Family offices and insurers in Chile boosted their investments in foreign alternatives by 75% over the past three years, helping international private asset managers keep their footing in the country as the local pension funds withdrew from the market.
According to data compiled by placement agent Alpine Capital Advisors, Chileans’ total investment in international alternatives dropped to $1.4 billion in 2017 from $2.5 billion in 2015, which is largely attributed to the country's pension funds retreating from the asset class due to regulatory uncertainty.
Over that same period, family offices and insurers increased their investment in alternatives and in 2017 they were responsible for the full $1.4 billion committed to the asset class.
That’s up 27% from the $1.1 billion they invested in 2016 and 75% from the $800 million committed in 2015, Alpine Capital’s figures reveal.
The growth lines up with the global demand for potentially high-returning foreign alternative assets in a low-yield environment, said Alpine Capital’s Latin America head Daniel Mueller.
He added that both investor groups have become more sophisticated and have begun to see the results of earlier investments in alternatives.
‘The asset class has proved itself. [Family offices and insurers] have started to see that, effectively, this asset class has a higher return,’ he said.
In addition, in March last year, Chile’s central bank raised insurers’ foreign investment limit from 20% to 30%, allowing the firms to pump more cash into offshore alternatives funds.
Meanwhile, the pension funds have progressively recoiled from alternative assets. Alpine Capital’s data indicates the AFPs invested $1.7 billion in alternatives in 2015, $900 million in 2016 and nothing at all in 2017. At least three other market sources have confirmed the AFPs’ total withdrawal from alternatives last year.
The AFPs stopped investing in the asset class in August 2016 after Chile’s soon-to-be former president Michelle Bachelet proposed to make the AFPs bear the costs asset managers charge to run funds.
Pension funds have said the fees, which savers pay under the current scheme, could make it too expensive to invest in alternatives.
In addition, AFPs retreated as they awaited the final draft of a pension reform to boost their access to the asset class, which finally came into effect November 1, 2017.
With offices in New York and Santiago, Alpine Capital calculated the figures using its own estimates and public information from Chile’s market regulator.
The numbers show the capital committed through local feeder funds to alternatives vehicles of international managers, Mueller said.
Fall back to move forward
As family offices and insurers have boosted their allocation to international alternatives, Credicorp Capital's Ignacio Montes said has seen interest in real estate, as well as private equity and debt.
Chilean investors tend to have a large high yield exposure, and those sub-asset classes can help them boost their returns without raising risk too much, said Montes, who is Credicorp's head of institutional distribution.
‘They’ve basically been diversifying,’ Montes said. ‘[Now they’ve invested] in general not in core alternatives but opportunistic and value added. Those are all assets that return a bit more.’
The industry has celebrated the rising demand from insurers and family offices, but these investors pose a challenge to distributors because they each tend to invest from $5 million to $20 million in a fund, compared to a typical AFP ticket of $100 million, according to Montes and other industry sources.
This forces placement agents to rally more firms to successfully raise a fund, making it harder to meet managers’ requirements.
Still, distributors remain optimistic about the future of alternatives in Chile, given the family offices’ and insurers’ demand, and the expectation that the AFPs will return to the market later this year.
Felipe Monardez, a partner with Chilean alternatives and mutual fund distribution firm Excel Capital, expects the pension funds to resume their investments by June once they sort out their investment guidelines for the asset class.
‘I’d say that for the AFPs it’s an asset class that makes a lot of sense in the long term, and the investments they’ve already made, safe very few exceptions, have been very, very successful,’ he said.