Tighter capital adequacy and liquidity levels under the incoming Basel III banking regulations will create a void in long-term project finance that could be filled by institutions such as super funds, according to a JP Morgan executive.
Robert Bedwell, head of institutional-investor relationship management for JP Morgan, told a recent Sydney briefing that Basel III would take around US$20 trillion out of global bank liquidity and make longer term tenor, such as seven years, increasingly unattractive.
“The banks are going to be pushed out of that long-term financing and the institutions will come in,” said Bedwell.
“Bank balance sheets will have to shrink and assets will go into run-off.”
Insource or partner up?
Bedwell was part of a JP Morgan team that met institutional investors in Sydney and Melbourne in recent weeks to discuss alternative investment opportunities, comprising infrastructure, property and private equity.
He said that while many of the institutions were looking to make direct investment in alternatives and increasing their allocations, including in assets such as syndicated loans, this would require a large in-house team.
“I question if this is the way,” said Bedwell. “It may make sense to partner up.”
JP Morgan sees a niche in offering outsourcing and administration to funds that are accumulating a growing pool of alternative assets.
Commitment required for real assets
Dragana Timotijevic, senior investment specialist in Mercer’s Alternative Manager Research Boutique, told the briefing that the “poor performance” of the markets was driving strong interest in alternatives, with the most recent development a focus on real assets such as timber and farmland.
“But you need to be committed and a longer term investor,” she said.
Because of liquidity considerations, however, she said some of the alternative assets – such as long-term real assets – would be problematic for funds compliant with the upcoming MySuper criteria.
With the advent of MySuper, funds may separate assets pools to exclude non-traditional assets from default-fund options.
In terms of alternative assets, infrastructure remained the most attractive category for super funds, although property was also increasing in popularity. Funds were wary of private equity.