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Sovereign Wealth Fund Investment In Private Equity « Back
Selina Harrison, June 2012
Despite widespread economic uncertainty stemming from the sovereign debt crisis, volatility in many world financial markets and underperformance of certain asset classes, over the last year the aggregate total assets of sovereign wealth funds worldwide has increased considerably, jumping from $3.98 trillion during 2011 to its current figure of $4.62 trillion. Sovereign wealth funds are now equipped to commit a greater proportion of capital to longer-term and alternative investments. In recent years the overall levels of capital flowing into alternative assets, particularly private equity, from sovereign wealth funds has been significant, according to a recent Preqin report.

Fifty-seven percent of sovereign wealth funds are known to invest in private equity. Most of these do so through established funds, with 46 percent opting to gain exposure to the asset class via this method, while 11 percent gain exposure through direct investments. However, while 3 percent of sovereign wealth funds worldwide are considering making their first investment in the private equity asset class, 29 percent of all sovereign wealth funds have opted out of investing in private equity so far.

It appears that larger sovereign wealth funds are more inclined to invest in private equity funds. Indeed, 83 percent of sovereign wealth funds with total assets of $250bn fall into this category. Sovereign wealth funds with total assets of less than $1bn are far less likely to do so – just 25 percent of funds in this category invest in private equity funds.

As there is a relatively high number of sovereign wealth funds with significant assets under management based in based in Asia and the MENA region, it comes as no surprise that 73 percent of sovereign wealth funds that invest in private equity are based in these regions. Seventeen percent of North American sovereign wealth funds invest in the asset class, while in Australasia this figure stands at 7 percent. Just 3 percent of European institutions are known to invest in private equity, the smallest proportion. However, at present no funds in Sub-Saharan Africa, Latin America or the Caribbean are known to invest in the asset class.

Given the maturity and depth of the private equity industry in the US, it is unsurprising that 76 percent of sovereign wealth funds with exposure to private equity prefer to invest in North America. In Europe this figure stands at 72 percent, while 62 percent of sovereign wealth funds investing in private equity have a preference for Asia-focused vehicles. However, despite the relatively large number of sovereign wealth funds based in MENA, just 34 percent of sovereign wealth funds that invest in private equity invest in MENA focused funds. Furthermore, of the sovereign wealth funds that do invest in MENA focused private equity, the vast majority are based in the region themselves, and typically invest as a means of facilitating the development of surrounding areas.

The report also highlights that some sovereign wealth funds are adapting a global approach to the asset class. Focusing on opportunities across North America, Europe, Asia and the MENA region, as well as in the emerging markets, Qatar Investment Authority aims to hold a truly geographically diverse portfolio of investments, for example.

Of the sovereign wealth funds that actively invest in private equity, 79 percent have a preference for buyout vehicles. Since many of these institutions have high levels of assets under management, they are typically able to commit significant capital to private equity funds, which makes them attractive investors for buyout fund managers. Venture funds are also a popular choice for sovereign wealth funds; 59 percent of those investing in private equity vehicles seek to invest in this fund type. Meanwhile, on the back of recent volatility in financial markets, distressed private equity has gained popularity with sovereign wealth funds, with 38 percent of such institutions stating a preference for distressed debt.

Of the sovereign institutions that invest in private equity, the preference for multi-manager vehicles is on the rise. Up from 20 percent in 2011, this year 28 percent of sovereign institutions said they actively seek investment in private equity funds of funds. This trend is more pronounced among smaller sovereign wealth funds and those with less experience in the asset class, as funds of funds provide diversification through a single commitment, allowing them to gain exposure to a variety of underlying strategies and geographies.

Going forward, although the financial markets remain turbulent, evidence suggests that sovereign wealth funds will continue to have a strong interest in private equity and view the asset class as presenting favourable long-term investment opportunities. Sovereign wealth funds have increased their investment in private equity in recent years and these institutions represent a significant amount of the capital currently invested in private equity. Given that sovereign wealth funds are eager to obtain more diverse portfolios, it is expected that this trend is likely to increase going forward.

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