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Sovereign funds expected to increase PE allocations

SWF managers are helping drive growth in emerging markets private equity

By 2020, private equity is expected to draw the largest alternative investment allocation increases along with infrastructure and real estate funds, thanks to the appetite of new sovereign wealth funds for the asset class, according to a new report by PwC.

The Alternative Asset Management in 2020: Fast Forward to Centre Stage report noted that SWFs from South America, Asia, Africa and the Middle East are expected to increase private equity allocations to 30 percent by 2020, with PE assets within alternatives expected to increase between $6.5 trillion to $7.4 trillion in the same period.

Overall, alternative assets are likely to increase to $15.3 trillion by 2020. The next largest allocation increases are likely to be in real estate, which are projected to account for 41 percent of allocations in 2020, up from 38 percent this year.

“We clearly see sovereign investors as the catalyst for growth in alternative investment, with a particular emphasis on private equity,”  Mike Greenstein, global alternative asset management leader at PwC, told Private Equity International. “We think that the growth in the developing markets and the emergence of 21 new sovereign investors and the larger ones increasing their allocations will fuel the growth in the alternative investment industry.”

Greenstein said sovereign investors are increasingly playing a greater role in co-investments alongside general partners, which is helping further align GPs and LPs. “The ability to co-invest with private equity managers is attractive for the LP and GP,” he added.

Within alternatives, sovereign wealth funds have a preference for infrastructure and private equity, largely due to their interest in less liquid but higher yield generating investments, Greenstein said.

LPs based in Latin America and Asia represent a significant and, in certain cases, largely “untapped opportunity” for alternative investment fund managers, PwC's report noted.

The report also points out how sovereign investors are not just content at allocating large pools of capital to alternative investors, but have moved to acquire direct stakes in alternative investment firms. In 2007, Abu Dhabi's Mubadala Development Company acquired a 7.5 percent interest in Washington's Carlyle Group that valued the global private equity firm around $20 billion.

PwC reported that alternative firms have become more skilful at forming co-investment, joint venture, advisory and other arrangements that can provide sovereign funds with greater exposure to asset classes outside stocks and bonds.

The report also anticipates that private equity groups will increase their reliance on third party administrators over the next five years, which comes against the backdrop of increased regulatory oversight of financial sponsors in the US and Europe.