Sovereign wealth funds (SWFs) are taking the lead in co-investment activity as the slowdown in private-equity fundraising and rising borrowing costs encourage limited partners and fund managers to team up. Many SWFs were badly hit by the falling price of listed assets last year and are now keen to diversify.
Private markets open their doors to sovereign wealth funds
A marriage made in heaven
The challenges facing private-market firms in raising finance – including the sharp increase in the cost of borrowing money – mean many are turning to SWFs to get deals across the line. Not only do SWFs have plenty of money to deploy, but they can also be flexible and often move very quickly, according to Elizabeth Todd, a partner at the law firm Ropes & Gray, quoted by Bloomberg. 1
Moreover, says Todd, ‘where they find an asset they like, they do not feel limited to small minority investments with passive governance rights’.
Bloomberg also quoted ‘a senior executive at a top global sovereign fund’ as saying they’re encouraging buyout firms to pursue larger acquisitions even in this tight financing market.
Sovereign wealth funds have stepped up funding of private-equity deals ($ billion)
Many Gulf SWFs are flush with cash as a result of rising oil prices and, having been hit by falling listed prices last year, are keen to diversify into private markets, according to the latest annual Invesco Global Sovereign Asset Management Study. 2 The study found a strong preference for private credit funds among sovereign investors, who emphasised the favourable risk/return profile of the asset class and its high liquidity levels. Invesco added that ‘sovereign investors also noted that holdings are transparent and generally offer good diversification within the fund, as most funds are large-scale and invest in a wide range of issuers’.
Most sovereigns investing in private assets employ a combination of direct investments, co-investments and funds, with direct and co-investments considered vital for reducing expense ratios, according to the Invesco study.
Real estate is currently perceived by SWFs to be less attractive than infrastructure and private equity, mainly due to challenges in the office and retail sectors. Many are seeking to diversify into more attractive sectors such as industrials, healthcare, and data centres.
Infrastructure tops the list
Overall, however, infrastructure is now garnering the most interest from SWFs. The study found that, typically, sovereign investors prefer monopoly-like infrastructure assets with multi-decade contracts providing long-term, predictable revenues, and with implicit or explicit inflation pass-through overseen in a mature regulatory environment. Examples include major airports, toll roads, power networks, water supply, and electrical grids, whose long-term revenue streams align with the long-term goals of SWFs.
In another boost for private markets, the Norwegian SWF, the largest in the world, is now considering investing in private equity. The fund currently invests in unlisted real estate and unlisted renewable energy infrastructure, but its mandate prevents it from investing in private equity. In April, however, the $1.4 trillion fund welcomed a government request that it consider investing in unlisted equities, saying it would make a recommendation by the end of the year. 3
Elsewhere, Singapore’s highly respected SWF Temasek said in July that it was looking for opportunities in US private markets as ‘signs of some cracks’ appear, due to private-equity firms needing to sell their stakes in companies to raise liquidity. 4 Another Singaporean SWF, GIC, which manages the country’s foreign reserves and has assets believed to be over $700 billion, struck 63 deals involving US-based private companies in sectors including technology, healthcare and property in 2021 and 2022, up from 39 in 2018 and 2019. 5
The Financial Times said the focus on the US by one of Asia’s biggest SWFs reflects optimism in the resilience of the country’s top technology companies despite last year’s heavy sell-off, as well as a desire to invest in the rapidly expanding artificial-intelligence sector.
With borrowing costs likely to remain relatively high for some time, and the threat of a correction hanging over listed markets following surging prices this year, private markets are likely to remain attractive to SWFs for the foreseeable future.
1 https://www.bloomberg.com/news/articles/2023-07-19/private-equity-titans-tap-sovereign-wealth-to-get-deals-done
2 https://www.invesco.com/apac/en/institutional/insights/multi-asset/global-sovereign-study.html
3 https://www.reuters.com/business/finance/norway-wealth-fund-welcomes-government-request-unlisted-equities-2023-04-18/
4 https://www.bloomberg.com/news/articles/2023-07-11/temasek-posts-worst-performance-in-seven-years-as-markets-slump
5 https://www.asianinvestor.net/article/gic-temasek-emerge-as-2022s-most-active-sovereign-investors/482742
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