Thu, Jul 2, 2015
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. Opalesque Exclusive: New systematic strategy managed alongside research firm outperforms S&P500[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: An emerging CTA manager explains how he runs his strategy, which is based on an index produced by a research firm. Peter Turk is head of

  2. Larry Robbins' hedge fund Glenview buys 1m Tenet Healthcare shares[more]

    Komfie Manalo, Opalesque Asia: Glenview Capital Management said it bought an additional 979,482 shares at Tenet Healthcare Corp valued at $53.80 million, raising its stakes in the healthcare services company to 15.16%, reported

  3. Legal - Grayson’s hedge funds under scrutiny for possible ethics violations, Court rejects hedge fund’s motion to block merger of Samsung affiliates[more]

    Grayson’s hedge funds under scrutiny for possible ethics violations From Freebeacon.com: Rep. Alan Grayson is finding himself in hot water over managing hedge funds that bear his name, actions that are in possible violation of House ethics rules. Sitting members of Congress are prohibite

  4. Hedge funds panic over Greece[more]

    Komfie Manalo, Opalesque Asia: Some investors are in panic mode as Greek Prime Minister Alexis Tsipras announced Sunday night that the banks and the stock market would be closed Monday, said

  5. Alternative investment industry could grow to $13.6tln in five years[more]

    Komfie Manalo, Opalesque Asia: Leading auditing and advisory group PwC said that the global alternative investment industry, which includes hedge funds, private equity and real assets, is set to increase to $13.6tln within the next five years. "Be

banner