Impact-investment. Creating social benefit while generating attractive long-term returns is the goal of NN Investment Partners' Smart Connectivity strategy. Companies are sought that benefit from the shift towards a more sustainable economy, have a positive impact on the environment or society and contribute to the UN's sustainability goals with their innovative solutions.

"Did you know that around four billion people worldwide live in cities?" asks Ivo Luiten, Lead Portfolio Manager at NN Investment Partners (NN IP). "They generate around 60 percent of global GDP, but are also responsible for 70 percent of climate-damaging emissions. So to reduce greenhouse gas emissions and limit global warming, urban infrastructure is a very important place to start."

Buildings need to become more sustainable, transportation more efficient and less polluting, and the networks and infrastructure through which people communicate more reliable.

To turn cities into smart cities, infrastructure investments are needed above all. "These are likely to rise from the current ten trillion dollars a year to around 40 trillion dollars a year by 2040," says the expert, concluding, "So the potential for successful and innovative companies in this area is huge."

Robust infrastructure is one of four starting points of the smart connectivity strategy. Then there's security, with a focus on cybersecurity; improving productivity through software or automation; and broad knowledge sharing, particularly via the internet. "So we are looking for companies whose technological innovations support the shift towards a more sustainable world and therefore benefit from a long-term growth trend," says Luiten.

The big challenge, of course, is finding such companies. "We start our investment process by analysing potential companies in terms of ESG criteria - to what extent do they meet environmental and social criteria - and whether they take a responsible and transparent approach to corporate governance."

The next step is the analysis of classic, fundamental investment ratios. "We take a rather conservative approach here. The companies should already be established and profitable, i.e. generate a positive net profit for the year. The growth potential must be convincing. And the valuation reasonable." However, sustainable companies - especially from the technology sector - have also not been cheaply valued for a long time. "That's true, but the key is that we can expect sustained, structural growth over the long term. Then there is upside potential in stocks, even if they don't currently look cheap," Luiten explains.

One example is Alfen Beheer, a Dutch supplier of substations, energy storage systems and charging stations for electric cars. The company is thus benefiting from the shift towards a low-carbon economy and also has good growth prospects for years to come. In the first half of 2021, revenue climbed 29 percent from a year earlier, while net income rose 77 percent. "Even though the valuation doesn't look cheap right now with a price-to-earnings ratio in the triple digits, the company will grow into it," Luiten concludes.

But the most difficult and costly part of the selection work is the impact analysis - what does the company actually do that is positive? "We do this for each individual company using a three-step process we developed ourselves," Luiten explains. "The first step is to ask what proportion of revenue is associated with a positive impact and for how many people the company is making a positive measurable change," the portfolio manager explains, citing an example: "Helios Tower, which focuses on building and expanding mobile infrastructure in Africa, now provides 75 million people with access to mobile telephony and the internet via its mobile towers. This enables many to start a business, make money transactions and ultimately find a way out of poverty."

The second step is then to examine the effect in more detail. Is the positive impact just an accidental byproduct of normal business activity, or is it truly embedded in a company's DNA? "I want to know if the primary goal of management is to achieve positive impact," Luiten explains.

Then, in the third stage, he looks at whether the company's contribution to a better world is truly significant. "For example, we wanted to invest in a manufacturer of smart electricity metering systems. Actually, it was a good fit because these systems help save electricity. But we then found that the effect was very limited in terms of the energy transition and thus did not meet our high standards for impact."

At Helios, on the other hand, this is demonstrably significant. "Not only does this give many people in Africa access to the 4G network, but it also gives farmers, for example, access to better weather forecasts, which has a positive impact on crop yields. An upward spiral begins."

"This creates a portfolio of companies that have attractive return potential, but at the same time create a positive social or environmental impact with a substantial solution. And thus, ultimately, are likely to make the world a little better and investors a little wealthier," Luiten explains.

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// How to invest - in smart connectivity.

From the Impact strategy, NN IP has constructed the NN (L) Smart Connectivity fund (ISIN: LU0332192961). The portfolio consists of 35 to 40 stocks. The four growth sectors mentioned are weighted approximately equally to ensure sufficient diversification. The fund is currently invested to around 30 percent in software companies and just under 24 percent in IT companies. In addition, the focus is on small and mid-cap companies.

Over the past five years (as of 09/30-21), the fund has earned 17.10 percent per year. As of 08/31/2021, the portfolio has a 97 percent lower carbon footprint compared to the MSCI World, generates 98 percent less waste, and uses 93 percent less water.

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Special Publication:

NN Investment Partners

Bernd Riedel, Senior Sales Director,

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49 151 12 22 00 06

Space stocks. The first tourist flights into space have aroused interest in the investment theme of New Space. But there is much more to it than that: navigation and communication possibilities based on satellites, the observation of climate data from space or the exploitation of new sources of raw materials are fascinating development opportunities. There is enormous potential for the companies involved.

Space, endless expanses. The year is 2021, and these are the adventures of private spaceship captains who are giving tourists a glimpse of the Blue Planet and exploring whole new business opportunities.

This July, Virgin Galactic, the company owned by British billionaire Richard Branson, launched into space. On board: the founder himself and first tourists. However, the rocket only reached an altitude of 85 kilometers. And even though the passengers were thrilled, strictly speaking this does not yet count as space travel. This is because the so-called Kármán line, which separates aeronautics from space travel, is at an altitude of 100 kilometres.

A few days later, Amazon founder Jeff Bezos' Blue Origin did it better: its "New Shepard" launch vehicle flew beyond the Kármán Line with the founder, his brother and tourists on board.

Wealthy individuals are willing to pay a lot of money for such an experience. At an auction in June this year, one bidder bought participation in the Blue Origin flight for $28 million. At Virgin Galactic, an hour-and-a-half flight is said to cost around $250000 on average. According to media reports, the company already had about 600 bookings earlier this year. So for the providers of such flights, the effort can actually pay off.

Nevertheless, according to a UBS study, space tourism accounts for only about five percent of the total turnover in the New Space sector. The analysts currently put the current volume at around 450 billion dollars. By 2030, it is expected to be twice as much - around $900 billion. "In a broader context, New Space today is primarily about civil and military navigation and communication possibilities based on satellites," explains Jürgen Brückner of FV Frankfurter Vermögen AG: "But if we look further into the future, the use of other celestial bodies to develop raw materials will also be added."

Then there are hardly any limits to the imagination. "The value of the asteroid belt between the orbits of Mars and Jupiter is estimated at 700 quintillion dollars," explains Rolando Grandi of French asset manager LFDE. A quintillion is equal to a billion trillions, or a 1 with 30 zeros after it. Asteroid mining is therefore the stuff of future dreams.

Experts at the German private space company OHB have worked out theoretically how this potential could be exploited. At some point, they write, a small unmanned spacecraft with a few robots will fly to a near-Earth asteroid. There, the robots will mine resources needed on Earth. Because there are also metals, water and other materials, the robots can build a larger spaceship on the asteroid, extract fuel and eventually return to Earth with the raw materials.

Assembling the spaceship on the asteroid is a crucial aspect. After all, leaving the Earth's atmosphere with a cargo spaceship would be almost inconceivable.

Of course, this is still science fiction. But already today there are very real reasons to bet on a massive expansion of space travel. According to the LFDE, some 1200 satellites were launched into space in 2020 alone, with another 850 added by the end of May this year.

And according to the United Nations Office for Outer Space Affairs, 7389 satellites were orbiting the Earth at the end of April. "With them, it will be possible, for example, to close the last gaps on Earth that still exist in Internet services and communications," informs OHB's Carsten Borowy. Around 1800 of the satellites currently in orbit are already being used for communications.

More are apparently still needed as technological requirements continue to increase. As Sam Korus of US tech investor ARK notes, future needs will include GPS navigation, instant credit card authorization, supply chain tracking and food production optimization.

Korus concludes that satellites and their performance have therefore become an indispensable part of our daily lives. By 2030, according to scientific estimates, some 100,000 satellites will be orbiting the earth. The beneficiaries will be the operators of the satellite networks. SpaceX, for example, wants to equip airplanes or ships with Internet connections in this way - a first business model.

What is particularly interesting for investors is that the entire field of space travel is moving away from purely public-sector clients towards the private sector. This commercialization ultimately reduces costs. For example, if used rockets are partially reused, the next rocket launch is cheaper.

Twenty years ago, it cost about $25000 to launch a kilogram of weight into space; today, it's only about $2500. And according to Hélène Huby, CEO of The Exploration Company, the price should drop to $250 in the next five years. That would give the industry another boost. A doubling of sales, as UBS expects, therefore does not seem unlikely.

In this case, there would be enormous growth potential for companies in the new-space environment. The fact that investors are rewarding this is shown by the example of SpaceX. Tesla founder Elon Musk's space company is investing heavily in the space tourism sector, but is also working on complete communications coverage on Earth with its Starlink satellite network. As CNBC recently reported, SpaceX shares of the unlisted company changed hands for $560. That pushed the space company's value up to more than $100 billion.

SpaceX, Virgin Galactic and Blue Origin are only the most spectacular and well-known examples. Overall, entire ecosystems are being created around each of the New Space sectors. French asset manager LFDE has identified four potential investment themes that investors can roughly follow.

The first area comprises those companies whose activities are carried out from space. They explore space and monitor certain developments on Earth. Here, for example, we are talking about ever-improving satellite imaging techniques using artificial intelligence and machine learning. "In this way, environmental changes can be analyzed to better predict natural disasters," Grandi says. Companies offering such technology include Maxar Technologies and Spire Global.

The second area concerns companies that create a link between the earth and space. The main focus is on telecommunication systems or transport into space, although this is currently limited to sending satellites. An example of the latter is the US company Astra, a manufacturer of launch vehicles, which, according to LFDE, is developing a revolutionary technology that can send objects from any point on Earth to space stations, for example.

Another is Rocket Lab, another pioneer among small launch vehicle manufacturers. The company, which has launched a total of more than 100 satellites into space this year, has grown by more than 200 percent since the beginning of 2021.

LFDE estimates annual industry revenue for this entire sector at around $62 billion in 2019. It is expected to grow by an average of almost ten percent per year until 2027.

The experts summarize another segment under the topic of transversal technologies. In the future, things needed in space will be manufactured directly on site, i.e. in space itself. At the end of last year, ceramic parts were produced for the first time on the ISS space station using a 3D printer, which saves costs because they did not have to be transported there from Earth. Groups such as Unity and 3D Systems now offer printers that can be used to produce space-specific equipment in space. These technologies also include cloud computing or industrial design software.

Finally, there are the profiteers on Earth. One example is John Deere, manufacturer of agricultural machinery. It uses satellite data for precision agriculture. This enables better weather forecasts, optimisation of water management or more efficient farming - for example, through autonomously driving tractors. GPS company Garmin should also benefit from these innovations.

While this still sounds "down to earth", many other developments still seem far away. Investors who want to bet on them therefore need a lot of staying power - and a lot of imagination. But it can be worthwhile to be there when innovative companies advance many light years away from Earth into galaxies that no human being has ever seen before.

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// How to invest - in New Space.

As always with brand new, innovative topics with earnings prospects far in the future, it is difficult to estimate their valuation. Volatility in such areas is correspondingly high. Take Virgin Galactic, for example: its share price climbed from around $16 to $55 between mid-May and June of this year. Now, however, it has recently slumped sharply to below $20 because the company says the start of commercial operations will be delayed from the third quarter to the fourth quarter of 2022.

"One shortcoming is that there are otherwise only a few pure new-space companies on the stock market," says Jürgen Brückner of FV Frankfurter Vermögen AG. Accordingly, the key analysis task is to determine how much of a company's revenue is in this space. "Among the few companies that are exclusively active there are the German firms OHB and Mynaric, a manufacturer of laser communications equipment for airborne and space-based communications networks," the expert adds.

Other profiteers include: 3D printing companies, such as Unity or 3D Systems; AeroVironment, a provider of unmanned aerial systems; launch vehicle producers Astra and Rocket Lab; Iridium Communications, operator of a global satellite network; chipmaker Nvidia; Trimble Inc, a provider of geodetic measurement instruments, or Maxar Technologies.

A fundamental problem, however, is that in a rapidly evolving and changing field, technology changes rapidly. No one knows today who future winners will be and who will ultimately prevail. Accordingly, diversification is the key to success. Exchange traded funds on the market can therefore be an interesting investment alternative: For example, LFDE's Echiquier Space (ISIN: FR0014002VF5), which takes ESG criteria into account when selecting stocks and excludes manufacturers of controversial defence equipment, or ARK Space Exploration and Innovation (US00214Q8078), which basically covers the same topics as the LFDE fund, but also invests in defence companies such as Lockheed Martin, where space accounts for less than 20 per cent of sales.

Pure plays, companies that are entirely focused on space, are what the HAN ETF Procure Space (IE00BLH3CV30) aims for. That includes satellite and space technology or rocket makers. However, as all three were only launched during the course of this year, they do not yet have a meaningful history.

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Author: Gerd Hübner

Real estate industry. Buildings are among the biggest emitters of_CO2."We will therefore not succeed in complying with the Paris climate agreement without a sustainable real estate industry," Thomas Wiegelmann of Schroder Real Estate is convinced. Because the pressure on this sector will continue to increase, investors will have to pay very close attention to the sustainability of real estate investments in the future.

With high energy consumption and heavy reliance on fossil fuels, real estate is the focus of any strategy that aims to combat climate change. "For investors, this is a major challenge. After all, only companies that strategically position themselves correctly at an early stage will prosper in the long term," Thomas Wiegelmann, Managing Director of Schroder Real Estate, is convinced.

According to an analysis by the World Economic Forum, the real estate sector accounts for around 40 percent of global energy consumption per year - more than industry or transport. Around 20 percent of global greenhouse gas emissions are attributable to the building sector. And it consumes around 40 percent of the raw materials available each year.

Bringing emissions there towards net zero is a Herculean task. It is made even greater by global population growth and the trend toward urbanization. According to United Nations calculations, around two thirds of the world's population will live in cities in 2050. The fact that this means that much more will have to be built in the future adds to the pressure on the real estate sector to become more sustainable.

An important factor here is, of course, politics. Sustainable building has now been declared a guiding principle everywhere in Europe. At the same time, more and more large companies are now demanding compliance with sustainability targets in new rental agreements. After all, many of them have to prepare environmental reports themselves.

The capital market will also play a decisive role. In March 2021, the EU defined the requirements for sustainable funds. "Regulators are thus knocking down the first pegs," Wiegelmann makes clear. However, the criteria that buildings must meet in order to be considered "sustainable" have not yet been conclusively regulated. However, numerous quality seals and certifications have been established in recent years that have now achieved broad market acceptance, including LEED, BREEAM and DGNB. In some cases, further criteria are used in the assessment in addition to the life cycle assessment and the use of resources.

For real estate investors, dealing with this topic is particularly important today for one simple reason. What is currently being planned and built has an economic life of around 25 to 80 years, depending on the type of use. It is important to anticipate now what tenants and investors will demand of a property tomorrow. "Potential tenants will not rent in the future if your property is not sustainable. And investors will then buy it, if necessary, only at sometimes considerable valuation discounts," Wiegelmann predicts.

Accurate assessment of the sustainability aspect is therefore an important task and skill for investment and asset managers. The fact that there are a large number of certifications today, but as yet no uniform standard, makes this particularly difficult. "That is why it is so important for us to carry out our own due diligence specifically geared to the issue of sustainability, which enables us to make a sound assessment regarding the future viability of a property," explains Wiegelmann. This examines the entire life cycle of a building - from development and construction to operation and demolition. For new construction, conducting such an audit is still comparatively straightforward. "We typically deal with projects at a very early design or planning stage and can then work with the project developer towards a lower environmental footprint," Wiegelmann explains. Energy efficiency can be increased through improved insulation measures, for example. It is more difficult with existing properties. The decisive factor here is how much energy and heat a building consumes and how this consumption can be optimized. In addition to energy-saving renovation measures, digital options for managing real estate can also help. The catch: the energy-related refurbishment and optimisation of an existing property is typically associated with high one-off investment costs.

For the investor, it is therefore always important to weigh up which measures appear necessary for optimisation in the short, medium and long term and what the implementation will cost. "Because these also benefit the tenants to a large extent in terms of optimised operating costs, it is important to think about partnership models for financing at an early stage," advises Thomas Wiegelmann.

In many cases, the refurbishment will then be worthwhile. This is because buildings that have been modernised with a view to sustainability achieve comparatively higher rents and also have lower vacancy rates on average. This ultimately leads to a higher valuation and better prices in the event of a potential resale. One of the reasons for this is that purchasers must expect energy standards for existing buildings to become more stringent in the future. Sustainable buildings are therefore considered more future-proof than their conventional counterparts.

Now, Wiegelmann is convinced, it's a matter of making investment strategies more resilient to climate change: "Only those who pay attention to the future viability of their property will be able to be successful in the long term."

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Schroders' sustainability approach.

Investment house Schroders is a leading global asset manager with offices in 37 markets across Europe, the Americas, Asia and the Middle East, and Africa. Its global assets under management stand at €815.8 billion (as at 30 June 2021).

Founded in 1804, the company has long been guided by the principles of responsible investing. As early as 1998, it drew up its first corporate governance policy. The Principles for Responsible Investment followed in 2001. All Schroder management teams now incorporate ESG criteria into their investment process. They use five proprietary analysis tools that enable them to take sustainability aspects into account without being solely dependent on information from traditional rating agencies. This is also reflected in the classification of financial products. As of this year, the EU's Disclosure Regulation distinguishes between three types of funds:

Article 6 funds must disclose how they deal with sustainability criteria.

Article 8 funds promote environmental or social aspects. And Article 9 funds even pursue explicitly disclosable environmental or social objectives in the investment process.

All Schroders products comply with the requirements of Article 6. In addition, Schroders currently has a range of 75 Article 8 funds and nine Article 9 funds, which is constantly being expanded.

As a member of the Net Zero Asset Manager initiative, Schroders is also committed to supporting the goal of zero emissions by 2050 or earlier. And in the Better Building Partnership, Schroder Real Estate is working to improve the sustainability of real estate.

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Special Publication:

Dr. Thomas Wiegelmann

Managing Director Schroder Real Estate Asset Management GmbH

Monetary policy. In recent years, the printing press has become the tool of choice to combat economic crises. Central banks bought bonds with "freshly printed money" to stabilize the banking system in the 2008 financial crisis and cushion the impact of the current pandemic. Meanwhile, the balance sheets of the FED and the ECB have grown to nearly double-digit trillions. Who is footing the bill?

Whenever disaster threatens, the cavalry comes. In the economy, the central banks have been doing this job for years. "And even if the rescue policy of recent years has been subject to repeated criticism, the successes to date speak for themselves: despite severe turbulence, the economy has been able to return to a growth path each time and make up for the losses in prosperity," explains Carolin Schulze Palstring, Head of Capital Market Analysis at Metzler Private Banking.

Nevertheless, a sense of unease remains. The idea of money being created out of thin air to solve all (financial) problems seems too good to be true. Long-lasting crises would become a thing of the past, and no one would have to bear the cost. "Questions inevitably arise," Schulze Palstring makes clear: "What is the price for this 'modern' way of dealing with crises? And who will have to pay it in the end?"

To get to the bottom of possible answers to these questions, it is first worth taking a closer look at the past two years. In order to limit the spread of the coronavirus, the emergency brake was pulled several times economically. Never before have governments around the world simultaneously imposed a forced pause on their own economies. Economic processes were thrown out of gear, people lost their jobs, supply chains are still disrupted, and the price structure is severely distorted. As a result, the global economy contracted by more than three percent year-on-year in 2020 - a negative record in post-war history.

Equally record-breaking, however, is the speed with which the losses in prosperity were recovered. In the People's Republic of China, they were recovered just one quarter after the outbreak of the pandemic, in the spring of 2020. The United States had to contend with lockdowns for longer, but thanks to an early vaccination campaign was able to significantly reduce Corona case numbers from January 2021. U.S. GDP then reached pre-crisis levels about a year after the outbreak of the pandemic, in the second quarter of 2021. And Europe is expected to be ready by early 2022.

So, compared to the sluggish pace of economic activity after the 2008 financial crisis, the post-Corona economic recovery happened at a rapid pace. "In our view, the recovery is likely to continue in the coming year. Although temporary setbacks - depending on further pandemic events - cannot be ruled out, they are unlikely to be as severe as the initial economic slump in 2020," predicts Schulze Palstring, "so the acute phase of the economic crisis is over - even if the virus is still affecting large parts of social life."

We have the courageous intervention of central banks and governments to thank for the rapid economic recovery. For this broke a vicious cycle of falling demand, less production, rising unemployment and further falling demand. Governments fully or partially compensated for revenue shortfalls in the private sector and avoided mass unemployment. Central banks, through their increased bond-buying programmes, ensured that financing costs fell to new lows despite debt growth.

One thing is certain, however: the bailouts have come at a price. The national debt ratio in the industrialized countries shot up by more than 20 percentage points within a year. As a result, many observers worry that the debt burden may eventually become unsustainable for many countries.

"Granted: High debt can become very dangerous," Schulze Palstring analyzes, "but under the current circumstances it is not an acute problem." Insolvency, he says, is when the debtor is no longer able to meet his due payment obligations. "Paradoxically, however, the pressure to repay has not increased much after the Corona crisis - despite the increase in debt," the expert explains. This is because a large part of the issued government debt disappears into the balance sheets of central banks.

What few people know: Most central banks distribute their profits - including interest income - to the national government every year. In other words, the coupon payments on the bonds held by the central bank are largely made by the governments to themselves. When the liabilities held by the respective central bank are deducted from the national debt, the situation no longer looks quite so dramatic (see dotted line).

The question of repayment is also not acute for these debt instruments, since the central banks are reinvesting maturing holdings for the time being. Moreover, the monetary authorities are creating so much additional demand for bonds with their large-scale purchases that the market interest rate is being kept artificially low. "Under these circumstances, we assess the acute risk of a debt crisis - at least in the industrialised countries - as low," Carolin Schulze Palstring sums up.

Nevertheless, high government debt can have serious consequences in the medium to long term: Central banks are trapped in their loose monetary policy, the scope for fiscal countermeasures in future crises has narrowed, and today's society is living at the expense of future generations.

So how might debt be reduced in perspective? The intuitive answer is to spend less money than is collected. In terms of the national budget, this would involve either harsh austerity in the form of spending cuts or an increase in revenue via tax increases.

"Both paths are enforceable in a democracy, but they cost votes," Schulze Palstring reflects. Apart from that, governments run the risk of stalling the economy and thus making the situation even worse should they overdo it with budget consolidation.

A look at history shows that there is another way. Over the past 150 years, many countries have run up large debts. Some managed to reduce their debt ratios again. Others, the debt expanders, failed (chart below). The intriguing question in this context is: How did the two groups differ?

"The key factor was the macroeconomic environment," Schulze Palstring analyzes. In the cases where the debt ratio had fallen again, interest rates (financing costs) were lower than economic growth. As a result, debt rose less rapidly than gross domestic product (GDP) in subsequent years. The public debt ratio - debt to GDP - was lowered, and countries were able to comfortably "grow out" of debt.

In the group of debt-expanders, on the other hand, the interest rate was much higher than economic growth, further exacerbating the debt situation. "So it is important to keep growth high and interest rates low if it is to work to avert debt crises," Carolin Schulze Palstring concludes. What are the chances today?

"Growth prospects currently depend heavily on political decisions," explains the strategist. So far, the economic upswing has been largely bought by government debt. It is now important that the economy can stand on its own two feet again and grow on its own. Generous state aid increases the risk that insolvencies will be postponed and over-indebted companies will tie up resources for unproductive purposes.

Political leaders must therefore not miss the moment to pull back. "Crisis management based on the watering-can principle is no longer necessary at present," Schulze Palstring is convinced: "Now is the time to focus attention on investment in order to permanently increase the growth potential of the national economy." The new infrastructure package in the US and the European reconstruction fund can provide important impetus in this regard. If the private credit and investment cycle were then to pick up, much would be gained.

But even if real growth rates then remain lower than hoped, the opportunity for debt relief is not lost. For nominal economic growth includes not only the quantity of goods produced, but also the prices at which these goods are sold - and here the inflation trend is decisive.

Currently, the US and Europe are experiencing a surge in inflation. However, economic experts largely agree that the exceptionally high inflation rates will only be temporary. As soon as the pandemic situation eases, according to the majority opinion, the aforementioned special effects should also lose their effect and inflation will return to moderate levels.

"Nevertheless, we are unlikely to return to the inflation levels of the past decade. Rather, inflation rates are expected to reach or even exceed the two percent mark on a sustained basis," Schulze Palstring suspects. This is due to high money supply growth (see chart below), massive government budget deficits and a likely shortage of labour. "In addition, long-term trends such as demographics and globalization are reaching a turning point or at least taking a pause. They are putting less downward pressure on prices than before."

Debtors are the main beneficiaries of higher inflation rates. Since debt is a nominal quantity, less has to be repaid each year - in purchasing power terms. So successive inflation would be good news for public finances, as it would allow the mountain of debt to be paid off without anyone having to be explicitly asked to pay.

"The bill is then paid by savers, however, who are gradually expropriated through negative real interest rates - nominal interest rates below the rate of inflation," Schulze Palstring points out. An example shows the devastating effects: A supposedly safe investment in a ten-year German federal bond worth 100,000 euros leads at the current interest rate level at the end of the term to a real asset loss of over 18,000 euros - assuming that the market participants are right with their inflation expectations of about two percent per annum. However, the strategy of financial repression only works as long as inflation does not get out of control. Although debt would then lose value more quickly, in return central banks would be forced to raise interest rates quickly and sharply. "That would be impossible to do without risking a systemic crisis," explains Schulze Palstring, "the states are more dependent than ever on low interest rates.And investors in the stock and real estate markets would be sensitive to interest rate changes."

Fortunately, the expert says, uncontrolled price rises are not yet foreseeable today. "But we still expect real interest rates to remain negative for many years to come. The key question for investors is therefore how to preserve assets in this environment."

Her answer is clear: "There will be no money to be made with nominal values for the foreseeable future. On the contrary, there is often even the threat of a certain loss. In this environment, it is advisable to keep an overweight in substance assets, for example in shares."

Even in the event of a systemic crisis caused by inflation - which is extremely unlikely from today's perspective - private investors would be better off with substantial assets. "After all, equities securitize a share of the productive assets of an economy. Nominal assets, on the other hand, are just a pure money promise that can also be repaid in devalued purchasing power," explains Carolin Schulze Palstring and concludes: "Not for nothing is it said that inflation is a way of halving a banknote without hurting the paper."

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Special Publication:

B. Metzler seel.Sohn & Co. AG

Untermainanlage 1, 60329 Frankfurt am Main, Germany

Secondary Private Equity. In times of low interest rates and high valuations on the stock markets, classic portfolios of shares and bonds no longer work as well as they did in the past. "I therefore advise restructuring the portfolio," explains Florian Dillinger, Matador Partners Group: "Private equity, the participation in unlisted companies, stabilizes and increases the return."

"Take a little trip back in time with me to the year 2031," prompts Florian Dillinger, Matador Partners Group, "and consider what returns will probably be achieved in the individual asset classes in the coming years."

In the bond sector, the pro says, that's pretty straightforward. "Even if we come out of the negative interest rate era very slowly, it's not likely to be more than one to two percent with high quality bonds - at best." And even in the stock market, the trees are unlikely to grow to the sky as they have in the past. "At some point, the current high valuations will normalize. That's why many professionals assume that equities, too, will only yield five to six percent per annum on average instead of the usual eight to nine percent."

For investors who have long made around seven percent returns with a traditional 60/40 split between stocks and bonds, this is creating an "aha" effect. "Over the next ten years, it's probably only going to be four percent," Dillinger calculates, concluding, "Investors either have to lower their expectations or change their portfolio structure - and in the best case, do it in a way that increases returns without increasing volatility."

Sounds a bit like squaring the circle. "But it can be done by reallocating a 20 per cent share - ten per cent equities and ten per cent bonds - to private equity. This new structure makes a portfolio sustainable. Because private equity should bring more returns than equities - and with less fluctuation."

Detlef Mackewicz, Managing Director of Mackewicz & Partner and consultant at Matador, explains that two factors are primarily responsible for this: "A broader investment spectrum and active management of the property."

In the U.S., for example, 95 percent of companies are privately held, according to UBS. Through the vehicle of private equity, investors can participate in exciting business models to which they would otherwise never have access. By taking a significant stake, managers of private equity funds are also able to initiate changes in strategy or operations, directly contributing to value creation. "This is a key difference compared to equity investing," clarifies Mackewicz.

Indeed, private equity returns then also averaged between 7.6 and 14.5 percent. "And the fact that investors' nerves were spared in the process is quite simply due to the valuation method," adds Mackewicz. "Whereas market prices for stocks and bonds are determined every second and massive over- and undervaluations therefore occur, the value of private equity investments is only determined on a quarterly basis. That's why investors don't feel the fluctuations. Psychology, which is often such a drag on the stock market, doesn't play a role here." "And because of the illiquidity, they are not even tempted to sell at the wrong time for mostly unfounded, purely stock market psychological reasons," adds Florian Dillinger.

In view of these advantages, it is not surprising that private equity has become a great success story. Never before has so much money flowed into this sector. "Unless some other catastrophe occurs in the few weeks of the current year, 2021 will set a new fundraising record," informs Mackewicz.

While the fact that a lot of money is currently being raised is good for the sector, it also poses risks for investors. "There is already a risk that managers will overlook many a weakness in companies when buying. The combination of a lot of capital and low interest rates, coupled with some investment pressure, can lead to increased risk appetite," Dillinger reflects.

From an investor's perspective, therefore, even more caution than before is called for. "In no other asset class are the differences between the results of the best and the worst funds as large as in private equity. While the top five percent of funds achieve annual returns of well over 20 percent, the returns of the worst five percent, however, also reach into negative territory," analyzes Mackewicz.

For investors in private equity funds, it is therefore a major challenge to select those that can form a stable and balanced portfolio from the annual offering of around 1,000 funds currently being fundraised. "Even professionals often spend weeks on fund selection and have to ask themselves numerous questions at different levels," explains Dillinger (see chart below).

But there are even more hurdles: Investors with a track record of successful private equity programs have broadly diversified their investments and, most importantly, spread them across all vintages-regardless of the current economic climate. Such a portfolio, covering venture, small, mid, large and mega buyout segments as well as the US, Europe and Asia regions, can easily include 20 to 30 fund investments. "The amount of work for the investor is then enormous. And building such a portfolio requires a significant amount of capital," explains Dillinger.

Even those who manage to do this haven't won. "The most successful private equity funds only take on a few large investors. They are generally not interested in many small ones," Dillinger explains.

For private investors to get involved there, so-called feeder funds have to be created first. These are offered by banks, asset managers and issuing houses.

For the initiators concerned, this is an attractive business model. "For the investor, however, this does not apply without restrictions," clarifies Dillinger, "because the additional structures are often associated with high costs. And these - issue surcharge, annual management fee, profit sharing - naturally reduce the private investor's return." "Let's assume that a professional institutional investor achieves an average of ten to twelve percent net return per annum across all market phases with a well-balanced private equity program," Mackewicz reflects, "Even if the private investor had the same private equity funds in his portfolio, his return would probably be four to five percent lower because of the costs for the intermediaries. The net return would probably only be between five and eight percent."

"At that point, structural reform would be of little use. That's why Matador Partners Group gives its shareholders access to a private equity portfolio with an excellent track record and attractive dividend yield at a low cost," explains Dillinger, concluding, "A portfolio of 50 percent equities, 30 percent bonds and 20 percent private equity should thus again create around six percent returns over the next decade."

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Secondaries - investing intelligently in private equity.

The listed investment company Matador Partners invests primarily in so-called secondary private equity funds. Compared to primary funds, this offers five interesting advantages:

Firstly, capital is drawn down more quickly in the case of secondary investments. This results in an accelerated build-up of assets. The J-curve effect common with primaries is mitigated or completely avoided. Not only can investors expect earlier returns, they also have a broad portfolio of funds of different vintages, regions and styles at their immediate disposal.

Second, secondary fund managers are not buying a black box. The assets are already in the fund and can be well valued. This reduces risk and is particularly important in venture capital because for many startups, it becomes obvious in the first few years whether they have a real opportunity.

Third, it allows the investor to blend in vintages of funds that are no longer available on the primary market.

Fourth, the costs are lower because the fund has a shorter remaining life and the management fees of the first years have already been paid by the original investor who is now selling his shares.

And fifth, the transaction often results in discounts to the presumed value of the company because a seller wants to part with his stake and is therefore willing to make concessions on the price.

In the past, this strategy has worked extremely well. "We have been able to achieve a net average return of 12.8 percent per annum over the past 15 years," informs Florian Dillinger. Matador is currently involved in 23 private equity funds with a total of around 1400 companies.

The shares of Matador Partners Group are traded on the home exchange BX Swiss (ISIN: CH0042797206). Through this vehicle, a broadly diversified secondary portfolio without minimum investment restrictions is available to all interested investors. In the last two years, the share price has risen from 3.50 to 4.44 Swiss francs.

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Matador Partners Group AG

Grundacher 5, CH-6060 Sarnen

41 41 662 10 62

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