/ Pension Regulator Levels Playing Field for Pension Fund Investments in Private Equity Infrastructure

May 19, 2020

Pension Regulator Levels Playing Field for Pension Fund Investments in Private Equity Infrastructure and Real Estate Funds. Developments in Domestic Private Debt to Provide Liquidity for SMEs. Investments in Gold are Further Regulated.

However, while funds investing in a wider range of Chilean private debt instruments will now be eligible investments for Chilean pension funds, they will be sharing the space in terms investment limits with other alternative asset classes such as private equity, foreign private debt, infrastructure, real estate and gold ETFs.

Felipe Cousiño


In the search for higher returns, Chilean pension funds have been for some time very close to using all their allowance for investment in variable income. This has meant that any asset classes that cease to be considered variable income for the purpose of the investment limits in the regulations are at an advantage over other asset classes. This is what had been occurring with infrastructure and real estate investments made in Chile as opposed to foreign infrastructure and real estate investments. Indeed, domestic infrastructure and real estate where excluded from the variable income limits, while foreign investments in those asset classes were not. This was obviously putting investment in foreign infrastructure and real estate at a disadvantage and in practice restraining the exposure of pension funds to these asset classes.

The pension regulator has now addressed this issue, as well as other issues, by means of an amendment to the pension fund Investment Regime published on May 12, 2020 and by means of amendments (i.e. NCG 267 dated May 23, 2020) to other pension regulations in order to implement these changes.

Indeed, the new regulations now exclude foreign infrastructure and real estate vehicles, as well as co-investments, from the investment limit imposed on variable income instruments. However, the requirement is that the relevant investment vehicles, must in fact invest at least 95% of their assets in either infrastructure or real estate. Otherwise the investment vehicle will not be able to benefit from this exclusion.

A second amendment is to explicitly allow for investment in domestic private debt vehicles. There was some discussion as whether this was allowed, particularly when the underlying investment would be instruments such as unrated promissory notes and invoices.

This amendment is a development that pension funds had been requesting for some time, but is also designed to fit into a broader government program to provide additional sources of funding to SMEs via CORFO (government development promotion agency) guaranteed facilities of up to 80% to domestic investment vehicles that would in turn finance non-bank financial institutions such as factoring and leasing firms. Such investment vehicles would be open to qualified investors that would include not only pension funds, but also insurance companies and family offices.

Among the positive aspects of the implementing amendments contained in NCG 267 is that the portion of the investment that is guaranteed by the government will count towards the investment limits in government instruments and not in other types of instruments, such as fund shares or non-government debt.

This new regulation seems a welcome source of finance for many SMEs that are struggling during this COVID-19 crisis, but raises concerns as to whether it will in practice take off.

Indeed, the amendment to the Investment Regime treats these new types of investments in domestic private debt as alternative investments, sharing the space in terms of investment limits with other alternative asset classes such as private equity and foreign private debt. This will probably make the investments in domestic private debt less attractive given that they would compete with foreign private equity and private debt investments which typically have better risk return ratios.

Moreover, this will not be a cheap source of financing for SMEs considering the number of intermediaries that will be involved.

Another amendment refers to gold ETFs. The Investment Regime was also amended on May 12, 2020 to include gold ETFs as an asset class that pension funds could invest in, gold being the only commodity which pension funds may have any kind of exposure to. The regulator, by means of NCG 267, has now fine tuned its regulation on gold ETFs by introducing certain restrictions, apart from the already existing requirement that they be traded on a formal foreign secondary market and that their underlying assets be backed either physically or by futures. The restrictions apply to gold ETFs that follow inverse, leveraged or factor based strategies or that invest in mining companies: such gold ETFs will be prohibited investments for pension funds.

Other amendments include changes to how derivatives exposure of pension funds will be calculated, moving from a notional basis to mark-to-market.

If you need further information, please feel free to contact our capital markets team.