The wealth of nations

Sovereign wealth funds’ role in the private equity asset class – through funds and direct investing – will only go in one direction: up.

Sovereign wealth funds’ exposure to private equity has significantly increased in the past couple of years. They had $154 billion in private equity funds as of the first quarter, up 24 percent from the same period in 2015, according to the Securities and Exchange Commission’s Private Funds Statistics report published in October. And that’s without counting direct deals.

Like many other institutional investors, SWFs that are well-established in private equity are increasingly going direct. As we reported in November, this may be behind some interesting events at the Kuwait Investment Authority.

Almost half of SWFs surveyed in PwC’s Sovereign Investors 2020 report in 2016 said they would invest in targets directly, up from 21 percent two years earlier.

“They want to do it on their own,” says Babak Nikravesh, a partner at Hogan Lovells and one of the organisers of the inaugural Sovereign Investors Conference in New York. “Concretely, that means scaling up and putting people on the ground.”

The most sophisticated are expanding their footprint to assist in direct deals. Singapore state investment firm Temasek Holdings opened a San Francisco office in February, while Abu Dhabi SWF Mubadala opened one in October. This week, the latter also established a formal presence in Moscow.

Those that don’t have the geographic presence or in-house expertise are using co-investment to get up to speed, says Nikravesh, with some trying to make the minimum commitment to high-profile funds to gain access to dealflow.

SWFs are also increasing their focus on venture capital. While this isn’t new – sovereigns such as Temasek and fellow Singaporean GIC cashed in on Alibaba’s IPO in 2014, and others have made direct investments in unicorns, including Saudi Arabia’s Public Investment Fund’s $3.5 billion investment into Uber – it has shot up dramatically. They invested more in high-tech companies in 2016 than in the previous 10 years combined, according to the Sovereign Wealth Fund Report 2016, published by Sovereign Investment Lab in July.

As these trends develop they will start to move SWFs from the ‘partner’ to the ‘competitor’ category for private equity firms. However, these are just a few of the giants.

A number of smaller and emerging SWFs are exploring investing in private equity for the first time. Panama, for example, is likely to make its entrance in private equity in 2018, intending to ultimately allocate 5-10 percent of its $1.4 billion assets.

A flurry of SWFs, including smaller ones such as Rwanda’s and the Turks and Caicos Islands’, have also popped up in the past few years and could tap private equity in years to come. You can read more on this in our emerging markets focus next week.

“As these funds emerge and grow, they move from government securities to public equities and real estate and then eventually to alternative asset managers because they need the returns,” says Paul Downs, a partner of Nikravesh’s. “It’s a very typical progression that we see.”

These new entrants will ensure that SWFs remain the fundraisers’ friends as well as dealmakers’ foes.

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