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View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/ra/Preqin-Real-Assets-Spotlight-May-2016.pdf  Feature Article Sovereign Wealth Funds Investing in Infrastructure Download Data

Sovereign Wealth Funds Investing in Infrastructure Using extracts from the 2016 Preqin Sovereign Wealth Fund Review and data from Preqin’s Infrastructure Online, Joe McGee and Selina Sy examine these investors’ plans and preferences concerning infrastructure investments.

Sovereign wealth funds continue to Fig. 1: Aggregate Sovereign Wealth Fund 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 6.51 global fi nancial markets. Despite market 6.31 volatility and the ongoing decline in 6 5.38 commodity prices, which has reduced Other Commodity the capital available to some sovereign 5 4.62 wealth funds, AUM managed by these investors reached $6.51tn in March 3.95 Non-Commodity 4 3.59 2016 (Fig. 1). This is over double 3.22 the aggregate assets held in 2008 3.07 3 Hydrocarbon ($3.07tn), the year Preqin launched its fi rst Sovereign Wealth Fund Review.

Management ($tn) 2 Total Assets under The long-term stable yields offered by Management infrastructure investments can help Aggregate SWF Assets under 1 explain their appeal to sovereign wealth funds and their ability to withstand 0 illiquidity, making them particularly suited to the asset class. In addition, Mar-15 Mar-16 many funds have an explicit mandate Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 to help develop local economies and Source: 2016 Preqin Sovereign Wealth Fund Review infrastructure investment is often seen as an effective means of doing so. The A further 7% of sovereign wealth 3). Nevertheless, there remain some proportion of sovereign wealth funds funds are considering investing in funds that have mandates which restrict investing in infrastructure has increased infrastructure, suggesting that the asset allocations to alternative investments steadily in recent years, from 57% in class could see continued growth in the such as infrastructure; among sovereign 2014 to 62% in 2016 (Fig. 2). This is years ahead. This interest has also been wealth funds not currently investing the same proportion as those that invest noted by fund managers: among those in infrastructure, 73% do not currently in real estate, and together these two surveyed for the 2016 Preqin Global allocate to any alternative asset asset classes are the most commonly Infrastructure Report, 48% reported classes and only invest in more liquid targeted by sovereign wealth funds. increased interest from sovereign instruments such as ﬁ xed income and wealth funds over the previous year (Fig. equities.

Fig. 3: Fund Managers’ Views on Whether They Are Fig. 2: Sovereign Wealth Funds Investing in Each Asset Seeing More Appetite for Infrastructure from Different Class, 2014 - 2016 Types of Investor

100% 100% 90% 86%86% 90% 25% 22% 21% 82% 28% More 80% 81% 82% 80% 52% 48% Appetite for 80% 2014 70% 57% 70% Infrastructure 62% 67% 60% 60% 60% 55% 59% 57% 62% 51% No Change 54% 50% 50% 47% 47% 2015 40% 76% 71% Wealth Funds Wealth 33% 67% 73% 40% 35% 31% 32% 30% Less Appetite 30% 40% 48% 52% Proportion of Sovereign 24% 2016 20% 30% for 20% Infrastructure

Proportion of Respondents 10% 10% 0% 3% 3% 5% 2% 2% 7% N/A N/A 0% Plan Public Insurance Company Natural Foundation Sovereign Endowment Resources* Family Office Real Estate Wealth Fund Pension Fund Pension Fund Retail Investor Private Sector Infrastructure Hedge Funds Private Debt* Private Private Equity Private Fixed Income Public Equities Public Investor Type Source: 2016 Preqin Sovereign Wealth Fund Review Source: 2016 Preqin Global Infrastructure Report

*Please note: Preqin has only been collecting private debt information on sovereign wealth funds since 2014, and natural resources data since 2015.

2 Real Assets Spotlight / May 2016 © 2016 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/ra/Preqin-Real-Assets-Spotlight-May-2016.pdf  Feature Article Sovereign Wealth Funds Investing in Infrastructure Download Data

Source of Capital Fig. 4: Source of Capital: Sovereign Wealth Funds vs. All Other Long-Term Liability Investors Sovereign wealth funds are typically 100% larger than other institutions and have 7% greater assets available for infrastructure 90% 4% 21% investment. The average AUM held 80% 14% by sovereign wealth funds investing in infrastructure is $116bn, compared 70% 21% with $25bn for other long-term liability 60% investors* such as pension funds, 50% superannuation schemes, insurance 23% 40% companies and endowment plans. As a 75% result, sovereign wealth funds are more 30% likely to have a dedicated allocation

Proportion of Investors 20% to the asset class; 75% of sovereign 36% wealth funds that invest in infrastructure 10% do so from a separate infrastructure 0% allocation, compared with only 36% of Sovereign Wealth Funds Other Long-Term Liability Investors* other long-term liability investors (Fig. 4). Separate Infrastructure Allocation Part of Real Assets Allocation Part of Private Equity Allocation Other Allocation Route to Market Source: Preqin Infrastructure Online Due to their larger AUM, sovereign Fig. 5: Preferred Method of Exposure to Infrastructure: Sovereign Wealth Funds wealth funds typically have the vs. All Other Long-Term Liability Investors investment expertise and resources required to consider direct investment in 100% infrastructure projects. This also means that these funds are less reliant on the 90% 18% diversiﬁ cation provided by infrastructure 80% fund managers within the context of their 49% 70% overall portfolio. Sovereign wealth funds are therefore signiﬁ cantly more likely to 60% make direct investments in infrastructure 50% 9% than comparable investors. Forty-two 79% percent of sovereign wealth funds invest 40% in infrastructure solely through direct 30%

holdings, while a further 49% combine Proportion of Investors 20% 42% direct and unlisted fund investment; by contrast, 79% of other long-term 10% liability investors access the asset class 0% 3% solely through fund vehicles, with only Sovereign Wealth Funds Other Long-Term Liability Investors* 3% investing exclusively through direct holdings (Fig. 5). Direct Investment Only Fund Investment Only Both Direct and Fund Investments

Source: Preqin Infrastructure Online Fig. 6: Notable Completed Direct Infrastructure Deals Involving Sovereign Wealth Funds, 2014-2016

Deal Size Total Stake Asset Location Industry Investor(s) Date (mn) (%) Power ITC Holdings Corp. US GIC 1,230 USD 20.0 Apr-16 Distribution Abu Dhabi Investment Authority, CDPQ, Hastings Power TransGrid Australia Funds Management, Spark Infrastructure, Wren 10,300 AUD 100.0 Nov-15 Distribution House Infrastructure Management** China Investment Corporation, China Merchants Kumport Turkey Shipping 940 USD 65.0 Sep-15 Group, COSCO Corporation Singapore

Motorway Abu Dhabi Investment Authority, Allianz Tank and Rast Germany Service Capital Partners, MEAG Munich Ergo Asset 3,500 EUR 100.0 Aug-15 Stations Management, OMERS

H.R.L Morrison & Co, New Zealand RetireAustralia Australia Senior Homes 640 AUD 100.0 Dec-14 Superannuation Fund

Source: Preqin Infrastructure Online

*Other long-term liability investors include public and private sector pension funds, superannuation schemes, insurance companies and endowment plans. **Wren House Infrastructure Management is the London-based direct infrastructure investment platform of Kuwait Investment Ofﬁ ce.

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The resources available to sovereign Fig. 7: Regional Preferences of Sovereign Wealth Funds Investing in wealth funds allow them to participate Infrastructure in some of the largest deal opportunities through their direct investment arms. 70% For example, in November 2015 two 59% sovereign wealth funds, Abu Dhabi 60% Investment Authority (via Tawreed 50% 50% 48% Investments) and Kuwait Investment 46% 43% 43% 43% Authority (via Wren House Investment 40% Management), joined a consortium 35% which successfully bid for the 99-year 30% lease of TransGrid – owner and operator of the electricity transmission network of Infrastructure 20% New South Wales, Australia. The deal 10%

was worth approximately AUD 10.3bn Proportion of SWF Investors in and ﬁ nanced with between AUD 5.5bn 0% and AUD 6bn of bank loans provided

by a syndicate of banks which included Asia Other MENA OECD

ANZ, Commonwealth Bank, DBS Bank, Global North Europe America United Overseas Bank and Westpac Markets Emerging Banking Corporation. Regional Preference

Regional Preferences Source: 2016 Preqin Sovereign Wealth Fund Review

Sovereign wealth funds investing in infrastructure seek opportunities Fig. 8: Sovereign Wealth Funds Investing in Infrastructure by Project Stage worldwide; 59% of sovereign wealth fund investors maintain a global scope for 100% 89% infrastructure investments, illustrating 90% the importance of regional diversiﬁ cation within the investment portfolio for 80% 76% 74% some of these investors (Fig. 7). Half 70% of sovereign wealth funds allocating to infrastructure have a preference for 60% European investments, followed by Asia 50% (48%) and MENA (46%). 40% Infrastructure Forty-three percent of sovereign wealth 30% funds investing in infrastructure have 20%

a preference for deploying capital in Proportion of SWF Investors in emerging markets. These developing 10% countries remain attractive to sovereign 0% wealth fund investors due to the Greenfield Brownfield Secondary Stage continued demand for infrastructure investment in emerging market Project Stage economies, offering the potential for higher growth, prospective excess Source: 2016 Preqin Sovereign Wealth Fund Review returns on their investments and Sovereign Wealth Funds Investing in Economic and Social diversiﬁ cation away from developed Fig. 9: markets. Infrastructure, 2014 - 2016

100% 98% One investor that has targeted 100% 95% infrastructure assets in emerging 90% markets in recent years is GIC (formerly 83% Government of Singapore Investment 80% 73% Corporation); in October 2013, GIC 70% invested in IFC Global Infrastructure Fund, which provided exposure to a wide 60% 2014 range of economic assets in emerging 50% markets. In 2014, GIC then acquired a 44% 2015

stake in Neptune Stroika Holdings, a Infrastructure 40% Philippines-based hospital group which 30% 2016 owns eight hospitals and a diagnostic

centre in the country. Proportion of SWF Investors in 20% 10% Asset Preferences 0% Eighty-nine percent of sovereign wealth Economic Social funds have a preference for greenﬁ eld Project Stage assets, seeking a higher risk proﬁ le in Source: Preqin Sovereign Wealth Fund Review, 2014-2016

4 Real Assets Spotlight / May 2016 © 2016 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/ra/Preqin-Real-Assets-Spotlight-May-2016.pdf  Feature Article Sovereign Wealth Funds Investing in Infrastructure Download Data

return for the stronger yields and greater Fig. 10: Industry Preferences of Sovereign Wealth Funds Investing in tolerance of risk typically associated with Infrastructure these less mature and less established infrastructure assets (Fig. 8). Signiﬁ cant 100% 95% proportions of sovereign wealth funds 90% 86% also invest in brownﬁ eld (76%) and 80% 64% secondary stage (74%) infrastructure, 70% 61% 59% 60% 55% 55% 52% 50% 48% illustrating the appeal of more mature, 50% 45% 45% 43% established assets and the way that 36% 40% 30% sovereign wealth funds can look to 30% 20%

mitigate risk by investing across a range Proportion of SWF of project stages. 10%

Investors in Infrastructure 0%

While sovereign wealth funds have Water Roads Utilities

long targeted economic infrastructure Energy Railway Seaports

projects, in recent years, sovereign Telecoms wealth funds have become increasingly Facilities Transportation aware of the opportunities available Facilities

for investment in social infrastructure, Natural Resources Renewable Energy Education Facilities Distribution/Storage Aviation/Aerospace Healthcare/Medical

such as government buildings and Waste Management facilities for education and healthcare. The proportion of sovereign wealth Industry Preference funds targeting social infrastructure has Source: Preqin Infrastructure Online increased from 44% in 2014 to 83% in 2016 (Fig. 9). In terms of specifi c Fund (NIIF) which was approved by the pressure to distribute, rather than re- industries targeted, the vast majority of Indian Government in July 2015. The invest, their capital. On the other hand, sovereign wealth funds invest in energy fund will seek to maximize economic as more investors, including sovereign (95%) and transportation infrastructure impact mainly through infrastructure wealth funds, continue to be attracted (86%) and signifi cant proportions also development in commercially viable to infrastructure investments, they target utilities (64%), water (61%) and projects – both greenfi eld and brownfi eld may struggle to fi nd opportunities at telecoms (59%, Fig. 10). – including stalled projects. The fund reasonable valuations, particularly in will be managed as a commercial developed markets. Nevertheless, due Outlook organization and will operate at arm’s to their large size and greater capacity length from the Indian government. to access the full range of opportunities, Sovereign wealth funds have come to sovereign wealth funds will continue play an increasingly important role as Over the coming year, however, there to be well placed to take advantage of global investors in recent years, and remain two challenges which will shape those opportunities as they become the sovereign wealth fund model of the way that sovereign wealth funds available, and it seems likely that investing looks set to continue, with nine choose to invest in infrastructure. On sovereign wealth funds will continue to sovereign wealth funds either in their the one hand, funds based in countries play an important role in infrastructure early stages or planning to launch in the dependent on hydrocarbon resources investment in the years ahead. coming years. One of these is India’s to meet their fi scal spending may National Investment and Infrastructure face reduced infl ows and increased

Fig. 11: 10 Notable Sovereign Wealth Funds Currently Investing in Infrastructure

Assets under Investor Location Management Geographic Focus Route(s) to Market ($mn) Abu Dhabi Investment Authority United Arab Emirates 773,000 Global Direct, Listed, Unlisted

China Investment Corporation China 746,730 Global Direct, Unlisted

State Administration of Foreign Exchange China 599,510 Europe Direct

Kuwait Investment Authority Kuwait 592,000 Global Direct, Listed, Unlisted

GIC Singapore 344,000 Global Direct, Listed, Unlisted

National Social Security Fund - China China 274,595 Greater China Direct, Unlisted

Qatar Investment Authority Qatar 256,000 Global Direct, Listed, Unlisted

Temasek Holdings Singapore 189,797 Global Direct, Listed, Unlisted

Abu Dhabi Investment Council United Arab Emirates 110,000 Global Direct, Unlisted

Future Fund Australia 85,598 Global Direct, Listed, Unlisted

Source: 2016 Preqin Sovereign Wealth Fund Review

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