Sovereign Wealth Funds and Their Investments in Private Equity Download Data

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Feature Article Sovereign Wealth Funds and Their Investments in Private Equity Download Data

Sovereign Wealth Funds and Their Investments in Private Equity

In conjunction with the publication of Preqin’s seventh Sovereign Wealth Fund Review, this month’s Spotlight turns to the community of sovereign wealth fund investors and looks at their level of activity within the private equity space.

Fig. 1: Aggregate Sovereign Wealth Fund Assets under Fig. 2: Proportion of Sovereign Wealth Funds Investing in Management ($tn), 2008 - 2015 Each Asset Class, 2013 vs. 2014

7 100% 90% 86% 86% 6.31 82% 81% 6 80% 5.38 70% 5 Other Commodity 59% 60% 4.62 60% 54% 57% 2013 51% 4 3.95 Non-Commodity 50% 47% 3.59 40% 2014 3.22 33% 3 3.07 Hydrocarbon 31% 30% 24% Total Assets under 20%

Management ($tn) 2 Management 10% N/A Aggregate SWF Assets under 1 0% Proportion of Sovereign Wealth Funds Proportion of Sovereign Wealth

0 Real Estate Infrastructure Hedge Funds Mar-15 Private Debt* Private Equity Fixed Income Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Public Equities Source: 2015 Preqin Sovereign Wealth Fund Review Source: 2015 Preqin Sovereign Wealth Fund Review *Please note: Preqin has only been collecting private debt information on sovereign wealth funds since 2014.

Sovereign wealth funds, despite being small in number and secretive Despite Fall in Oil Prices, Most Sovereign Wealth Funds Grow in nature, continue to capture attention as a result of their ever over 2014 growing assets under management and corresponding infl uence on global fi nancial markets. Today, the total assets of sovereign wealth Twenty-nine percent of sovereign wealth funds have seen their funds top $6.31tn (Fig. 1), more than double the capital these entities assets fall in size since 2013; of those that have lost assets over this represented in 2008, the year Preqin launched its fi rst Sovereign time, half derived their capital from hydrocarbons. Falling oil prices Wealth Fund Review. over the second half of 2014 have led to signifi cant withdrawals from some sovereign wealth funds by governments highly funded by such Since the previous Preqin Sovereign Wealth Fund Review, launched assets in order to provide stabilization or prevent recession, and also in October 2013, these institutions have grown by over $900bn to fi ll funding gaps. despite commodity and oil prices, the source of funding for many of the largest sovereign wealth funds, falling over 2014. Instead, For example, the combined assets of Russia’s National Wealth the growth in assets of sovereign wealth funds has been driven by Fund (NWF) and Reserve Fund have declined by over $20bn since continued funding from governments and reserves as well as from 2013. The effect of falling oil prices, as well as the impact of events investment returns generated by these investors in their continued such as the Ukraine confl ict, have caused the Russian economy to hunt for long-term yield in a low interest rate environment. shrink, leading to growing defi cits in the country and the withdrawal of international funding for projects either as a result of uncertainty In previous years, growth in the sector has been partially driven by in the region or as a result of international sanctions. Russia has the creation of new sovereign wealth funds; however, in 2014 just withdrawn capital from its sovereign wealth funds to cover defi cits a single new sovereign wealth fund was formed. Ireland Strategic and to stimulate the economy through capitalizing banks in order Investment Fund (ISIF) was created in 2014 with the mandate to to provide funding for infrastructure investments and lending. Other invest its resources in areas that will support economic activity and governments, such as that of Ghana and its Stabilization Fund, have employment in Ireland. However, future sovereign wealth funds indicated they will also be raiding sovereign wealth funds in order to continue to be planned. The Government of Hong Kong has been cover shortfalls in oil revenue. recommended by a working group within the region to allocate up to a third of its annual budget surpluses into a proposed ‘Hong Kong However, despite the negative impact of oil prices on some Future Fund’, in order to meet the growing expenses resulting from sovereign wealth funds’ assets, since October 2013, 59% of an ageing population. sovereign wealth funds tracked by Preqin have accumulated more assets under management. One of these sovereign wealth funds is Norway’s Government Pension Fund Global (GPFG), which grew

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Feature Article Sovereign Wealth Funds and Their Investments in Private Equity Download Data

Fig. 3: Five Largest Sovereign Wealth Funds Investing in Private Equity by Total Assets under Management

Fund Name Location Total Assets ($mn) Abu Dhabi Investment Authority MENA 773,000 China Investment Corporation Asia 650,000 State Administration of Foreign Exchange Asia 567,900 Kuwait Investment Authority MENA 548,000 Hong Kong Monetary Authority Asia 414,661

Source: 2015 Preqin Sovereign Wealth Fund Review by almost $43bn over this period. However, this is a relatively small the $31bn Texas Permanent School Fund State Board of Education increase in its total assets compared to the previous year, when it (SBOE), which has its private equity investments managed in four added nearly $180bn in assets under management. The fund was limited partnerships, each with an external investment manager. established to safeguard Norway’s assets from oil production for future generations, rather than to provide short-term stabilization for A number of sovereign wealth funds choose to invest in private Norway’s economy. Therefore, even though infl ows have slowed, companies directly and therefore avoid fees charged by fund and falling oil prices may continue to impact short-term distributions managers. Direct investment in companies allows for greater to the fund, it currently looks set to remain a long-term investor in operational control over portfolio companies, which is especially its pursuit to meet the Norwegian Government’s objectives. As the attractive if the sovereign wealth fund has broader social and fund’s vast assets under management make it an infl uential market economic goals in a particular area. RAK Investment Authority, participant on a global scale, many will be paying close attention to for example, has a preference for direct investment in domestic the fortunes of the sovereign wealth fund and the impact of oil prices companies and has previously entered into joint ventures in order on this most infl uential investor. to form partnerships that are of benefi t to the local economy of Ras Al Khaimah. Alternative Investments Conversely, there are a notable proportion of sovereign wealth funds The nature of sovereign wealth funds, with their longer term that are not as compatible to the private equity asset class; 42% investment horizons and, in general, lack of short-term liabilities, of sovereign wealth funds are known not to include private equity allows them to take not only signifi cant stakes in the funds and as part of their investment strategy. Funds with their own liquidity securities in which they invest, but also to maintain investments for concerns and anticipation of economic stress often favour more longer periods of time. Sovereign wealth funds’ capital allocations liquid assets such as public equities and fi xed income instruments, both directly to securities or assets, as well as to funds, can be as exemplifi ed in the investment strategy of Fundo Soberano do characterized as among the “stickiest” of all institutional investors’ Brasil (FSB). allocations as they seek returns over long periods and have less need to disinvest in times of crisis or turmoil. Sovereign Wealth Funds Investing in Private Equity by Total Assets under Management Traditional investments, such as equities and fi xed income securities, are widely used by sovereign wealth funds and are a relatively stable The fi ve largest sovereign wealth funds that invest in private equity part of the portfolios of these investors (Fig. 2). Alternative assets have combined assets under management of almost $3tn; three of have emerged as an increasingly important portion of the portfolios these are based in Asia and two in the MENA region. The largest of many sovereign wealth fund investors over recent years, as these sovereign wealth fund that invests in the asset class is Abu Dhabi investors seek to diversify their portfolios and acquire assets that Investment Authority (ADIA), which manages total assets of $773bn can generate yield and help them meet their long-term objectives. Fig. 4: Proportion of Sovereign Wealth Funds Investing in Suitability to Private Equity Private Equity by Total Assets under Management

100% Preqin’s analysis shows that almost half (47%) of all sovereign wealth 100% funds invested in private equity in 2014. The long-term investment 90% 88% 80% approach and vast pools of capital available to sovereign wealth 72% funds often make them suitable investors in the private equity asset 70% class. The highly illiquid and relatively risky nature of private equity, 60% 57% though unmanageable for many other institutions, is far less of a 50% 40% concern for sovereign wealth funds, which do not need to consider 32% short-term obligations. Private Equity 30% 20% 13% 10%

Different sovereign wealth funds approach their investments in Proportion of SWF Investors in different ways. Emirates Investment Authority (EIA), for example, 0% invests in private equity through direct and fund investments; the

sovereign wealth fund considers investments in vehicles that focus $1bn More $1-9.9bn $10-49bn $50-99bn Less than on a diverse range of industries across the MENA region, but it will $250bn or $100-249bn also consider investing globally. Other sovereign wealth funds access Total Assets under Management the asset class via separate account mandates. This is the case with Source: 2015 Preqin Sovereign Wealth Fund Review

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Feature Article Sovereign Wealth Funds and Their Investments in Private Equity Download Data

and has a target allocation to private equity of approximately 8.0%. The ability to deploy large amounts of capital and the lack of The largest Asia-based sovereign wealth fund investing in private liabilities when compared with other institutional investors makes equity is China Investment Corporation (CIC), which has total assets sovereign wealth funds well suited to the private equity asset under management of $650bn. In general, the larger the sovereign class. The established economies of North America and Europe wealth fund, the more likely it is to be a private equity investor. Fig. offer the greatest choice of fund managers and strategies, and a 4 shows that of sovereign wealth funds with total assets under higher deal fl ow than regions where private equity is still relatively management of less than $1bn, only 13% invest in private equity. immature. However, there has been a shift towards a global focus There are, however, exceptions; most notably, GPFG (whose for investment in the asset class, with increasing proportions of $818bn makes it the largest sovereign wealth fund in the world sovereign wealth funds targeting investments further afi eld than the by total assets) is not permitted to invest in private equity due to traditional markets. The larger sovereign wealth funds are attracted restrictions imposed by the Government of Norway. Its investments to the long-term returns these markets can provide, and seize the are directed towards public markets and real estate. opportunity to diversify risk away from their primary national revenue source. Many of the larger funds do, however, have the resources Outlook to source their own deals. With this we see a continued appetite for direct investments, allowing funds to reduce the cost of fees and Despite a reduction in the price of a barrel of oil, sovereign wealth carry. As sovereign wealth funds grow, data would suggest that they funds’ assets continue to grow in aggregate. Investments made will likely commit more capital to the private equity asset class. by sovereign wealth funds account for an increasing proportion of aggregate private equity capital raised, with 14% of institutional capital raised by private equity funds coming from sovereign wealth funds. This is a signifi cant increase compared with the levels witnessed in 2013 and 2014.

The 2015 Preqin Sovereign Wealth Fund Review

This article is an extract from the recently released Preqin 2015 Sovereign Wealth Fund Review, The 2015 our largest and most comprehensive review of sovereign wealth funds and their investment activity yet, Preqin Sovereign Wealth Fund Review featuring detailed proﬁ les for 73 sovereign wealth funds worldwide.

The 2015 Preqin Sovereign Wealth Fund Review is a vital tool for all professionals seeking investment or looking to work with this inﬂ uential investor class, and provides a comprehensive source of information

In association with:

for anyone seeking to ﬁ nd out more about this previously opaque group of investment funds. alternative assets. intelligent data

This year’s Review contains information on the following areas:

• Private Equity • Public Equities • Fixed Income • Hedge Funds • Real Estate • Infrastructure • Private Debt

Produced in association with PwC, this year’s edition has been fully updated, with more content than ever before. The Review contains exclusive information gained via direct contact with sovereign wealth funds and their advisors, plus valuable intelligence from ﬁ lings, ﬁ nancial statements and hundreds of other data sources.

For more information, to download sample pages or to order your copy, please visit:

www.preqin.com/swf