Sovereign wealth funds are starting to favour real estate over private equity and infrastructure as rising competition and deal execution challenges cast shadows over the asset classes.
A report by US-based asset manager Invesco, polling 97 sovereign institutions, found that limited options to deploy money into riskier assets that fit their mandates is leading investors to make fewer allocation changes than at any point over the last five years.
“[W]hile there are few alternatives to third-party management and fee structures across infrastructure and private equity (with co-investment in many cases challenged by fund governance and risk appetite), sovereigns have a broad range of options to participate in the development, acquisition and management of real estate,” the report noted.
Amid increasing competition for private equity deals, respondents now expect it will take them 2.4 years to reach their private equity allocation target, up slightly from 2.3 years last year.
In 2016 Invesco noted all types of sovereign investors it surveyed suffered a return gap. On average, these posted performance data about 2 percent below their return objectives. This trend further fed their appetite for alternatives – but not so much for private equity and infrastructure, due to difficulties in channelling the money.
The net beneficiary, instead, turned out to be real estate. “Investors are continuing to seek similarly attractive investment outcomes through real estate investment,” the survey said, noting that over two-thirds of sovereigns reported being overweight to global real estate in 2016, and just under half expected to be overweight again this year.
By contrast, 54 percent of sovereign investors said they were currently underweight to private equity due to execution challenges this year.
Investors had a dim view of the UK post-Brexit, with questions over potential import taxes and market access putting a serious dent into their appetite for British assets. Political change in developed markets, particularly Brexit and the US election, led to volatility in sovereign portfolios, challenging the robustness of risk models.
There will be wider implications for long-term geographic and asset allocation as policy changes such as terms of Brexit and US corporate tax reform are worked through governments, Invesco noted.
– additional reporting by Adam Le