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Super space for alternatives post-Basel III
Basel III will force banks out of the alternatives space, making way for superannuation funds said J.P. Morgan's head of institutional investor relationship management, Robert Bedwell.
He said one the core tenants of Basel III - the liquidity coverage ratio, which stress-tested a bank's balance sheet over 30 days - would push banks out of the long-term financing space.
When the tier 1 capital ratio increases from 4 to 6 per cent, banks could try to issue excessive amounts of additional tier 1 capital, but Bedwell said the market was not there.
"If you take the 40 largest banks in the world and you add up all of their assets, it comes to about $20 trillion dollars, so when we move to Basel III and that tier 1 ratio goes to 6 per cent … you can keep the balance sheet the same size, and in that case you've got to go off collectively and issue $400 billion worth of additional tier 1 capital - that's just not going to happen," he said.
Bedwell said the days when banks could add unsold assets to their balance sheets were gone, and the cost of capital meant banks were more likely to shrink balance sheets and become more selective to avoid over-hangs.
"If you're starting at $20 trillion and tier 1 capital goes to 6 per cent, you have to offload in aggregate $6.7 trillion worth of assets, so it's a huge amount of assets that will either run off and not be (renewed) or will need to find alternative sources of liquidity - ie, the funds," he said.
But superannuation funds needed to outsource the management of alternative assets to an expert, the panel said.
Bedwell said about 75 per cent of respondents at JP Morgan's Alternatives Forum on Tuesday - where approximately 70 funds attended - said they wanted to get into the alternative space via direct investing.
"It makes better sense to be partnering up with specialist managers who have a good track record and a good footprint in that space, especially from a banking perspective now - the world's changed," he said.
Joe Azelby, New York-based Head of J.P. Morgan Asset Management Global Real Assets recently released a white paper that said super funds would seek to increase investment in real assets from 17 per cent to 25 per cent.
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