Sun, Nov 23, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Private Equity Strategies

Sovereign Wealth Funds Increase Allocations to Private Equity

Friday, July 11, 2014

Allocating to private equity has been a target rich issue for critics of the industry lately. First the Securities and Exchange Commission (SEC) dropped the fees bombshell this summer, citing issues with fee structures at more than half of private equity firms. Then, rolling pension fund scandals from CalPERs, to North Carolina, through New Jersey, and up to Rhode Island painted an unfortunate picture of the industry. Still, asset flows into private equity are going gangbusters, valuations are rising and M&A activity is white hot. So it appears investors aren’t all that concerned. Now, a new report from Invesco shows that sovereign wealth funds are going all-in on private equity.

The Invesco data suggests that sovereigns see allocations to private equity and other alternative asset classes as strategic, rather than tactical allocations that can serve as a bulwark against weak developed markets and shaky global equities. Nearly all of the SWFs in the recent survey say that they plan to increase their allocations to alternatives this year.

“This year we observed similar demand for alternatives in 2013, with 51% increasing new exposure to real estate relative to the portfolio and 29% increasing new exposure to private equity relative to the portfolio on a net respondent view basis. Furthermore, all of the major alternative asset classes (real estate, private equity, infrastructure, hedge funds and commodities) were projected to increase on a net respondent view basis when sovereigns compared their forecasted asset placements for 2014 with their 2013 actuals,” the report says.

Infrastructure investments are likely to be big winners as well with allocations rising from an already high 44% to 53% over the next year. SWFs are typically big players in infrastructure investing given their mandates to provide long term value for the state, however, allocations to infrastructure only account for just over 20% of the portfolio in 2012. So, these increases are notable.

Another piece of this puzzle is the shifting view of risk within SWFs. Investment officials at a number of the biggest SWFs are taking a less conservative view of risk, and are willing to consider bigger investments in asset classes like private equity in order to meet portfolio objectives. A similar secular trend can also be observed in pension funds, another group of long-term investors that are facing similar issues of deploying capital for the best return profile.

Report data further shows that sovereigns are going beyond their home-market when looking for alternative investments. Historically, SWFs have kept to their own markets when it comes to investing even in vanilla areas like equities. But, as the global economy becomes more interconnected and state interests extend far beyond borders, the home-court bias is eroding.

“Respondents increasing new assets in emerging markets in 2013 typically referenced a decrease in home-market allocations rather than developed markets. On a net respondent view basis 11% of sovereigns reduced allocations to their home-market in 2013. This trend is important because home-market allocations account for a significant percentage of the total portfolio (42% on average across all sovereign investors in 2013). It suggests that sovereign investors could continue to increase exposure to both emerging and developed markets at the same time if home-market allocations continue to decrease,” report authors write.

Ultimately, these trends reflect a broader conversation happening at SWFs, pensions and the world’s largest investors - the short term gains in global equities may be great, so too recent realizations in private equity, but the longer term picture is harder to figure out. Investments in alternatives could well become a more mainstream way forward for long-term investors who are willing to trade liquidity for diversity and security.

 
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
Private Equity Strategies
Private Equity Strategies
Private Equity Strategies
Private Equity Strategies


Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Greenlight Re CEO says hedge fund reinsurance strategy buzz is validating[more]

    From Artemis.bm: The attention being paid to the hedge fund reinsurance business model and the fact that others are now looking to leverage bits of it within their own strategies, is validating for reinsurer Greenlight Capital Re, according to CEO Bart Hedges. There has been an increasing buzz

  2. Legal - Hedge fund manager fights £8m tax tribunal ruling[more]

    From FT.com: A hedge fund manager who may have to repay £8m in tax is trying to overturn a tribunal ruling that found he had attempted to shelter millions in an avoidance scheme. Patrick Degorce, chief investment officer at Theleme Partners, lost a tax tribunal case last year. HM Revenue & Customs c

  3. Europe - Hedge funds face exit tax as Iceland central bank discusses plan[more]

    From Bloomberg.com: Hedge funds and other creditors with claims against Iceland’s failed banks face an exit tax as the island looks for ways to unwind capital controls without hurting the economy. The government targets having a plan it can present by year-end that would map out how Iceland will sca

  4. Investing - George Soros puts $500m of his money on Bill Gross, Soros, Paulson backed Hispania Activos mulls Realia takeover, Ex-Credit Suisse trader’s hedge fund sees yen shorts as crowded, Hedge hunters double default-swaps as views split, Large hedge fund positions come under pressure, Vikram Pandit's fund picks 50% stake in JM Financial's realty lending arm for $87m[more]

    George Soros puts $500m of his money on Bill Gross From WSJ.com: Before Bill Gross was fully settled in at his new firm, Janus Capital Group Inc., he received an unlikely visit from the chief investment officer of famed investor George Soros ’s firm, according to a person familiar with t

  5. Hedge fund Oceanwood raises $2bn, to close to new investors[more]

    From Reuters.com: Europe-focused hedge fund Oceanwood Capital Management is closing its fund to new investors after its assets under management hit $2 billion (1 billion pounds) recently, a source with direct knowledge of the matter said. Oceanwood, a multi-strategy hedge fund spinout from Tudor Gro