Preqin’s May 2015 Private Equity Spotlight focuses on sovereign wealth funds’ increasing investment in private equity. The article highlights both the growth in sovereign wealth funds and the increasing percentage of their portfolios being committed to alternative investments including private equity.
According to the article, “Today, the total assets of sovereign wealth funds top $6.31 tn, more than double the capital these entities represented in 2008, the year Preqin launched its first Sovereign Wealth Fund Review.”
Growth in sovereign wealth funds
The Preqin article highlights that since October 2013, SWFs have increased their assets by $900 billion despite slumping commodity and oil prices throughout 2014. The continued growth in assets of sovereign wealth funds has been fueled by more government funding and reserves as well as from investment returns.
In the past, growth in the sector has been driven by the launch of new sovereign wealth funds. That said, only one new sovereign wealth fund was formed last year. Ireland Strategic Investment Fund was created in 2014 with the mandate to invest in areas that will support economic activity and employment in Ireland. Other sovereign wealth funds are planned for the future. The Government of Hong Kong is considering allocating as much as a third of its annual budget surpluses into a proposed ‘Hong Kong Future Fund’.
Long-term PE investments are suitable for sovereign funds
Preqin’s research shows that 47% of all sovereign wealth funds invested in private equity in 2014. Their long-term investment approach and large amounts of capital available to sovereign wealth funds means they are suitable investors for the private equity asset class. The illiquid and higher risk nature of private equity is less of a concern for most sovereign wealth funds as they do not have to worry about short-term obligations.
Breakdown of PE investments by fund
The five largest sovereign wealth funds that invest in private equity have combined assets under management of almost $3 trillion. Three of these are based in Asia and two in the Middle East / North Africa area. The largest sovereign wealth fund that invests in PE is Abu Dhabi Investment Authority, which manages assets of $773 billion and has a private equity target allocation of around 8.0%. The China Investment Corporation is the biggest Asia-based sovereign wealth fund that invests in private equity, and it has total assets under management of close to $650 billion. Preqin notes that, the larger the sovereign wealth fund, the more likely it will choose to invest in private equity.