View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-June-2016.pdf  Lead Article Sovereign Wealth Funds Investing in Private Equity Download Data

Sovereign Wealth Funds Investing in Private Equity

Alastair Hannah and Selina Sy provide an insight into this secretive and exclusive subset of the investor community, based on data from Preqin’s recently launched 2016 Preqin Sovereign Wealth Fund Review.

Sovereign wealth funds continue to Fig. 1: Aggregate Sovereign Wealth Funds Assets under Management ($tn), capture attention as a result of their December 2008 - March 2016 ever growing assets under management (AUM) and corresponding infl uence on 7 global fi nancial markets. Despite the 6.31 6.51 decline in commodity & oil prices and the 6 global volatility seen over the past year, 5.38 Other which has reduced the capital available 4.62 to some sovereign wealth funds, AUM 5 Commodity of these investors reached $6.51tn in 3.95 Non- March 2016 (Fig. 1). This is over double 4 3.59 Commodity the AUM held in 2008 ($3.07tn), the 3.07 3.22 year Preqin launched its fi rst Sovereign 3 Hydrocarbon Wealth Fund Review.

Management ($tn) 2 Relative to other institutional investors, Total Assets

sovereign wealth funds typically have Aggregate SWF Assets under under a greater tolerance for the illiquidity 1 Management inherent in private equity investments, allowing many sovereign wealth funds 0 to build private equity allocations that Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Mar-15 Mar-16 may not be feasible for other investor types. This is due to sovereign wealth Source: 2016 Preqin Sovereign Wealth Fund Review funds’ preference for returns, in order to increase capital reserves for future Fig. 2: Proportion of Sovereign Wealth Funds Investing in Each Asset Class, generations. These unique investors 2014 - 2016 have been steadily increasing their share of capital invested in private equity and 100% remain an important source of capital for 90% 82% 86% 86% the asset class. Fig. 2 shows that private 81% 80% 82% equity has seen greater participation 80% from sovereign wealth funds over the 70% 62% 60% 2014 past year, illustrative of the increasing 59% 62% 60% 51% 55% 57% sophistication of these institutions in 54% 50% 47% 47% 2015 constructing their investment portfolios 33% and the attraction of the asset class to Funds Wealth 40% 35% 31% 32% 2016 deliver their investment objectives. 30% 24% Proportion of Sovereign 20% As shown in Fig. 3, over half (55%) of 10% sovereign wealth funds are known to N/A N/A invest in private equity, representing 0% an eight percentage point increase from the proportion seen last year.

Thirty-eight percent of sovereign wealth Natural Resources* funds exclude private equity from Real Estate Infrastructure Hedge Funds Private Debt* Private Private Equity Private Fixed Income their investment strategy, often due to Public Equities liquidity prioritization or anticipation of a Source: 2016 Preqin Sovereign Wealth Fund Review period of economic stress. Chile-based Economic and Social Stabilization Fund, Assets under Management sovereign wealth funds (with total for example, does not invest in the asset assets under $1bn) invest in private class as it does not provide the liquidity Larger sovereign wealth funds are equity, rates of participation in the asset needed to meet the requirements of its more likely allocate to the asset class class increase steadily alongside AUM, mandates. than their smaller counterparts (Fig. reaching 100% for sovereign wealth 4). While only 20% of the smallest funds with total assets of $100-249bn.

*Please note that Preqin has only been collecting private debt information since 2014 and natural resources data since 2015.

8 Private Equity Spotlight / June 2016 © 2016 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-June-2016.pdf  Lead Article Sovereign Wealth Funds Investing in Private Equity Download Data

However, this rate declines to 89% Fig. 3: Proportion of Sovereign Wealth Funds Investing in Private Equity for those with total assets of $250bn or more. Norway-based Government Pension Fund Global, for example, is the largest sovereign wealth fund in 4% the world and does not invest in private equity due to restrictions imposed by Invest in Private Equity the Government of Norway. Instead, its portfolio is allocated to investments in public markets and real estate. Considering Investing in 38% Private Equity Location 55% Do Not Invest in Private Fig. 5 shows that sovereign wealth funds Equity investing in private equity are based across the globe. Middle East- and Asia- based sovereign wealth funds continue Unknown 3% to constitute the largest proportions of investors in private equity within this pool, accounting for 33% and 29% of funds respectively. While this is primarily due to the large numbers of sovereign Source: 2016 Preqin Sovereign Wealth Fund Review wealth funds based in these regions, this also illustrates the large appetite such investors have for the asset class and Fig. 4: Proportion of Sovereign Wealth Funds Investing in Private Equity by the vast amounts of capital allocated Total Assets under Management to private equity by these investors. 100% Sovereign wealth funds based in North 100% America, Europe and Africa also invest 89% in private equity, representing 14%, 10% 90% and 10% respectively of all sovereign 80% wealth funds investing in the asset class. 70% 65% Currently, no sovereign wealth funds 64% located in Latin America & Caribbean 60% invest in private equity; however, Fondo 50% 45% de Ahorro de Panamá has reported that 40%

it will consider investing in the asset Private Equity class once its total assets exceed 4% of 30% 20% Panama’s GDP. 20%

Proportion of SWF Investors in 10% Strategy Preferences 0% Buyout funds remain the most preferred Less than $1-9bn $10-49bn $50-99bn $100-249bn $250bn or private equity strategy among sovereign $1bn More wealth funds, with 72% of sovereign Total Assets under Management wealth funds investing in such funds (Fig. 6). The larger size of buyout funds Source: 2016 Preqin Sovereign Wealth Fund Review makes them attractive to sovereign wealth funds, as it allows them to Fig. 5: Sovereign Wealth Funds Investing in Private Equity by Location put large amounts of capital to work, while venture capital funds (which draw capital from 65% of sovereign wealth funds) allow for the nurture of 5% domestic enterprise and support the 14% economic development initiatives of the North America fund. Commitments to venture capital funds are a signifi cant component Europe of BpiFrance’s investment strategy, 29% 10% with known commitments to Europe- Middle East & Israel focused venture capital vehicles, Fonds Européen des Matériaux and CapAgro Africa Innovation.

Co-Investments and Separate Asia Accounts 10% 33% Australasia Due to their size, many sovereign wealth funds look to alternative routes to the traditional commingled fund model to gain access to the asset class in a bid Source: 2016 Preqin Sovereign Wealth Fund Review

9 Private Equity Spotlight / June 2016 © 2016 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/pe/Preqin-Private-Equity-Spotlight-June-2016.pdf  Lead Article Sovereign Wealth Funds Investing in Private Equity Download Data

for lower fees and greater transparency. Fig. 6: Strategy Preferences of Sovereign Wealth Funds Investing in Private Nearly half (47%) of sovereign wealth Equity funds investing in private equity are inclined to invest alongside 80% fund managers in co-investment 72% 70% 65% arrangements. Attractive benefi ts for co- 60% investors include portfolio diversifi cation, 60% 51% exposure to quality private equity 50% assets, the ability to evaluate the risk/ 40% 37% return profi le of an investment (that is 30% not necessarily available in traditional 30%

Private Equity 21% fund investments), better transparency 20% and mitigation of the J-curve effect as capital is deployed faster. 10% Proportion of SWF Investors in 0% Separate accounts provide sovereign wealth funds with a number of Funds Buyout Growth Fund of Capital

advantages, offering enhanced Venture

transparency in being the sole investor Other Turnaround Secondaries

of a fund, having greater control over Equity Private terms and conditions and the ability to Strategy Preference gain exposure to a bespoke product to achieve investment objectives. Alaska Source: 2016 Preqin Sovereign Wealth Fund Review Permanent Fund Corporation (APFC) is one such fund that prefers private equity Fig. 7: Regional Preferences of Sovereign Wealth Funds Investing in Private investment through separate account Equity structures; APFC will also co-invest alongside fund managers and invest in 90% fund of funds vehicles. 79% 80% Regional Preferences 70% 65% 65% 60% 60% Europe is the most attractive region for 60% 51% sovereign wealth funds gaining exposure 50% 47% to private equity, with 79% investing in the region (Fig. 7). Appetite for Europe- 40% focused private equity opportunities Private Equity 30% remains ahead of that for North America- focused investment (for which 65% of 20%

sovereign wealth funds have indicated Proportion of SWF Investors in a preference). Both Europe and North 10% America accommodate some of the 0% world’s largest and most established Global North Europe Asia MENA Other Emerging private equity fund managers and are America Markets the most mature private equity markets globally, thus offering a wide range of Regional Preference attractive strategies and opportunities Source: 2016 Preqin Sovereign Wealth Fund Review for investors.

Despite containing some of the largest private equity, increasing from 9% in sovereign wealth funds, just over Outlook January 2013 to 17% in January 2016, half of sovereign wealth funds target suggesting an expanding infl uence private equity in the MENA region, Private equity investment offers within the asset class. From the trailing emerging markets (for which diversifi cation within overall investment perspective of fund managers, securing 60% of sovereign wealth funds have a portfolios, potentially generating capital from sovereign wealth funds is preference). However, it is worth noting substantial returns over the long term an increasingly competitive endeavour, that some sovereign wealth funds in without the short-term volatility seen in with such investors looking for the best the MENA region pursue direct private public markets. Sovereign wealth funds opportunities to deploy capital, showing equity investment to support domestic, are contributing a growing proportion a healthy appetite for the asset class to social and economic initiatives. of total institutional investor capital to achieve their investment objectives.

Data Source:

The 2016 Preqin Sovereign Wealth Fund Review is our largest and most comprehensive review of sovereign wealth funds and their investment activity yet, featuring detailed profi les for 74 sovereign wealth funds worldwide.

For more information, or to order your copy, please visit: www.preqin.com/swf

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