Class act: 'High' potential for alternative assets in Chile

Annual growth in alternative assets under management (AUM) in Chile has been outstripping the global average and appears poised to continue. 

Globally, alternative AUM – private capital and hedge funds – expanded at an average annual pace of 11.3% in 2015-21, while in Chile annual growth averaged 30% over the past seven years, despite a recent deceleration.

“In general, it’s an industry that is growing at a very healthy pace,” Hugo Aravena, chairman of CFA Society Chile, an affiliate of global investment professionals association CFA Institute, told BNamericas. 

“Locally, there’s quite a lot of interest among sophisticated investors for this type of instrument.” 

Private debt, private equity and real estate have been driving the expansion, a trend largely reflected in Chile, where, for example, infrastructure and energy funds invest in highways, airports, logistics centers and power plants, among other assets.

Aravena said a key factor behind Chile’s rapid growth in percentage terms was a statistical base effect: “Chile is a relatively new player in this world of alternative assets.” 

He urged potential investors to exercise caution. The asset class, while attractive, has “very high implicit risks.”

“What we call ‘suitability’ is fundamental, determining how this investment fits within your portfolio, risk profile. An alternative asset isn’t for everyone,” he said.

Globally, alternative AUM are expected to register annual growth of 9.3% in 2021-27, reaching around US$23tn by the end of that period, according to an estimate from British financial data firm Preqin.

In Chile, around US$10.8bn was invested directly in local alternative assets via 229 funds as of end-June, according to a report from local investment fund association Acafi. The potential for the local industry is “high,” said Aravena. 

Investors in the asset class are tempted by factors such as liquidity and information asymmetry premiums, as well as partial shielding from the impact of macroeconomic volatility. 

Overall, Chilean public funds held US$33.9bn at end-June, after growing at an average annual pace of 16.5% in 2015-21. Over the first half of the year, AUM fell 3.9% stemming from a strengthening of the US dollar against the peso. 

Pension funds and insurance companies account for about 43% of AUM. Foreign investors are chiefly focused on the forestry sector, followed by the renewable energy industry. 

Traditional assets such as bonds and shares have been posting negative returns but, in turn, this is seen as creating a favorable pricing window for investors looking at the long or medium term.

PENSION REFORM BILL

In related news, Chile’s finance ministry said its pension reform bill, if passed and implemented, would help deepen and rebuild local capital markets. These were dented by a series of pandemic-related early pension savings drawdowns that saw the country’s private pension fund managers, or AFPs as they are known, sell off billions of dollars in assets, in turn, crimping access to funding for project developers. 

Under ministry projections, pension system domestic assets, expressed as a percentage of GDP, would return to early 2020 levels by around 2040. AUM held by the private pension system stood at US$154bn at end-October, down from around US$215bn in late 2019.

The bill calls for monthly pension contributions of 16.5% of gross salary, up from 10% at present. Pensions watchdog SP chief Osvaldo Macías outlined the impact, adding that measures would be taken to mitigate any potential fallout on asset prices.

“In the medium term, demand for financial assets in the capital market will increase, as contributions go from 10% of taxable remuneration to 16.5%,” Macías said during a recent investor event in London. “Therefore, there will be a significant accumulation of funds that will be channeled to the capital market, promoting its development.”

Under the bill, an autonomous public pension investor would manage the six-percentage-point chunk of the planned increase – which would be contributed by employers and go into a group pot. The remaining 0.5%, contributed by employees, would go into individual pension savings accounts and be managed by the public investor or a private player.