Sovereign Wealth Funds Investing In Infrastructure

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Sovereign Wealth Funds Investing In Infrastructure by Preqin

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 to1 capture attention as a result of their ever growing assets under management (AUM) and corresponding influence on global financial markets. Despite market volatility and the ongoing decline in commodity prices, which has reduced the capital available to some sovereign wealth funds, AUM managed by these investors reached $6.51tn in March 2016 (Fig. 1). This is over double the aggregate assets held in 2008 ($3.07tn), the year Preqin launched its first Sovereign Wealth Fund Review.

The long-term stable yields offered by infrastructure investments can help explain their appeal to sovereign wealth funds and their ability to withstand illiquidity, making them particularly suited to the asset class. In addition, many funds have an explicit mandate to help develop local economies and infrastructure investment is often seen as an effective means of doing so. The proportion of sovereign wealth funds investing in infrastructure has increased steadily in recent years, from 57% in 2014 to 62% in 2016 (Fig. 2). This is the same proportion as those that invest in real estate, and together these two asset classes are the most commonly targeted by sovereign wealth funds.

A further 7% of sovereign wealth funds are considering investing in infrastructure, suggesting that the asset class could see continued growth in the years ahead. This interest has also been noted by fund managers: among those surveyed for the 2016 Preqin Global Infrastructure Report, 48% reported increased interest from sovereign wealth funds over the previous year (Fig. 3). Nevertheless, there remain some funds that have mandates which restrict allocations to alternative investments such as infrastructure; among sovereign wealth funds not currently investing in infrastructure, 73% do not currently allocate to any alternative asset classes and only invest in more liquid instruments such as fixed income and equities.

Sovereign Wealth Funds

Source of Capital

Sovereign wealth funds are typically larger than other institutions and have greater assets available for infrastructure investment. The average AUM held by sovereign wealth funds investing in infrastructure is $116bn, compared with $25bn for other long-term liability investors* such as pension funds, superannuation schemes, insurance companies and endowment plans. As a result, sovereign wealth funds are more likely to have a dedicated allocation to the asset class; 75% of sovereign wealth funds that invest in infrastructure do so from a separate infrastructure allocation, compared with only 36% of other long-term liability investors (Fig. 4).

Sovereign Wealth Funds

Route to Market

Due to their larger AUM, sovereign wealth funds typically have the investment expertise and resources required to consider direct investment in infrastructure projects. This also means that these funds are less reliant on the diversification provided by infrastructure fund managers within the context of their overall portfolio. Sovereign wealth funds are therefore significantly more likely to make direct investments in infrastructure than comparable investors. Forty-two percent of sovereign wealth funds invest in infrastructure solely through direct holdings, while a further 49% combine direct and unlisted fund investment; by contrast, 79% of other long-term liability investors access the asset class solely through fund vehicles, with only 3% investing exclusively through direct holdings (Fig. 5).

Sovereign Wealth Funds

Sovereign Wealth Funds

The resources available to sovereign wealth funds allow them to participate in some of the largest deal opportunities through their direct investment arms. For example, in November 2015 two sovereign wealth funds, Abu Dhabi Investment Authority (via Tawreed Investments) and Kuwait Investment Authority (via Wren House Investment Management), joined a consortium which successfully bid for the 99-year lease of TransGrid – owner and operator of the electricity transmission network of New South Wales, Australia. The deal was worth approximately AUD 10.3bn and financed with between AUD 5.5bn and AUD 6bn of bank loans provided by a syndicate of banks which included ANZ, Commonwealth Bank, DBS Bank, United Overseas Bank and Westpac Banking Corporation.

Sovereign Wealth Funds

Regional Preferences

Sovereign wealth funds investing in infrastructure seek opportunities worldwide; 59% of sovereign wealth fund investors maintain a global scope for infrastructure investments, illustrating the importance of regional diversification within the investment portfolio for some of these investors (Fig. 7). Half of sovereign wealth funds allocating to infrastructure have a preference for European investments, followed by Asia (48%) and MENA (46%).

Forty-three percent of sovereign wealth funds investing in infrastructure have a preference for deploying capital in emerging markets. These developing countries remain attractive to sovereign wealth fund investors due to the continued demand for infrastructure investment in emerging market economies, offering the potential for higher growth, prospective excess returns on their investments and diversification away from developed markets.

One investor that has targeted infrastructure assets in emerging markets in recent years is GIC (formerly Government of Singapore Investment Corporation); in October 2013, GIC invested in IFC Global Infrastructure Fund, which provided exposure to a wide range of economic assets in emerging markets. In 2014, GIC then acquired a stake in Neptune Stroika Holdings, a Philippines-based hospital group which owns eight hospitals and a diagnostic center in the country.

Sovereign Wealth Funds

Asset Preferences

Eighty-nine percent of sovereign wealth funds have a preference for greenfield assets, seeking a higher risk profile in return for the stronger yields and greater tolerance of risk typically associated with these less mature and less established infrastructure assets (Fig. 8). Significant proportions of sovereign wealth funds also invest in brownfield (76%) and secondary stage (74%) infrastructure, illustrating the appeal of more mature, established assets and the way that sovereign wealth funds can look to mitigate risk by investing across a range of project stages.

Sovereign Wealth Funds

While sovereign wealth funds have long targeted economic infrastructure projects, in recent years, sovereign wealth funds have become increasingly aware of the opportunities available for investment in social infrastructure, such as government buildings and facilities for education and healthcare. The proportion of sovereign wealth funds targeting social infrastructure has increased from 44% in 2014 to 83% in 2016 (Fig. 9). In terms of specific industries targeted, the vast majority of sovereign wealth funds invest in energy (95%) and transportation infrastructure (86%) and significant proportions also target utilities (64%), water (61%) and telecoms (59%, Fig. 10).

Sovereign Wealth Funds


Sovereign wealth funds have come to play an increasingly important role as global investors in recent years, and the sovereign wealth fund model of investing looks set to continue, with nine sovereign wealth funds either in their early stages or planning to launch in the coming years. One of these is India’s National Investment and Infrastructure Fund (NIIF) which was approved by the Indian Government in July 2015. The fund will seek to maximize economic impact mainly through infrastructure development in commercially viable projects – both greenfield and brownfield – including stalled projects. The fund will be managed as a commercial organization and will operate at arm’s length from the Indian government.

Over the coming year, however, there remain two challenges which will shape the way that sovereign wealth funds choose to invest in infrastructure. On the one hand, funds based in countries dependent on hydrocarbon resources to meet their fiscal spending may face reduced inflows and increased pressure to distribute, rather than reinvest, their capital. On the other hand, as more investors, including sovereign wealth funds, continue to be attracted to infrastructure investments, they may struggle to find opportunities at reasonable valuations, particularly in developed markets. Nevertheless, due to their large size and greater capacity to access the full range of opportunities, sovereign wealth funds will continue to be well placed to take advantage of those opportunities as they become available, and it seems likely that sovereign wealth funds will continue to play an important role in infrastructure investment in the years ahead.

Sovereign Wealth Funds

Unlisted Natural Resources Debt Funds

Joe McGee examines the current state of the unlisted natural resources debt market, looking at how investment has developed in recent years and the strategies targeted by funds currently in market.

Under pressure from increased regulation and capital requirements since the Global Financial Crisis, many banks have looked to deleverage and reduce their lending, creating opportunities for fund managers to provide a range of financing options for natural resources companies. Options to invest within the sector are broad and range from distressed funds seeking to take advantage of the pressure faced by highly leveraged oil & gas producers – at a time of low energy prices – to lenders specializing in operational finance, bridge loans or royalty-based financing.


Since 2010, 54 unlisted natural resources funds that invest in debt have reached a final close, raising a combined $29.2bn in aggregate capital (Fig. 1). Of this, the majority ($23.2bn) was raised by funds with a primary focus on energy companies, including those involved in the extraction, processing, storage and transportation of oil, natural gas and other non-renewables, as well as renewable energy sources including solar panels and hydro-power (Fig. 2). This may be explained by the shale gas boom in the US, which increased demand for debt financing at the same time as some traditional lenders tried to bolster their balance sheets. As the commodity cycle has turned, distressed  investors have also seen opportunities in the sector, where the subsoil assets held by companies can potentially prove valuable even in the event of debt restructuring.

Nevertheless, there are several fund managers that have successfully raised funds both before and after the recent slump in prices, which aim to adopt a longer term view of the prospects for
the natural resources sector. Chambers Energy Capital, for example, is a Texas-based investment firm that successfully closed its third fund in July 2015. Chambers Energy Capital III secured $900mn and provides debt financing to small- and medium-sized US-based energy companies. Typically, it targets  those structured as first or second lien credit facilities, unsecured debt, net profits interest or other similar mezzanine structures.

The majority ($23.0bn) of capital raised since 2010 has been secured by funds focused primarily on North America (Fig. 3). In part, this reflects the flows of private capital natural resources investment in the region which has a longer tradition of private ownership of natural resources assets than many other areas. As discussed in the 2016 Preqin Global Natural Resources Report, 72% of all capital raised by natural resources funds in 2015 was raised by funds with a primary focus on North America. It is also due to the relative maturity of the US private debt market, which has a longer history of non-bank lenders providing capital to the market.

Funds in Market

There are currently 32 unlisted natural resources funds in market that will invest in debt; collectively, these funds are targeting an aggregate $23.2bn (Fig. 4). This figure includes 19 funds focused on making debt investments in energy assets, targeting $14.5bn. The opportunities available in the sector following the decline in energy prices have attracted two types of firms to consider raising vehicles: large alternative fund managers with experience in private debt have come to view energy as a promising sector at a time of low yields in many other industries, while some energy-focused private equity firms have also investigated the benefits of offering debt-focused vehicles.

In the case of the former, Angelo Gordon & Co., an established alternative investment fi rm with extensive experience in credit investment, is seeking $1bn for Angelo Gordon Energy Credit Opportunities Fund, specifically to target opportunities resulting from the dislocation in oil prices. The fund will primarily originate first or second lien secured loans but will also invest through purchases of secondary market secured debt, stressed and distressed loans, bonds, royalties and production payments.

Sovereign Wealth Funds

For the latter, one of the largest energy-focused private equity fund managers, Riverstone Holdings, is currently targeting $1bn for Riverstone Credit Partners, which will focus on providing credit to buyouts of energy companies and other assets that are heavily weighted by debt, targeting upstream and midstream oil & gas companies, energy services, as well as the power and coal sectors. The firm aims to take advantage of regulations affecting the amount of capital banks must hold against loans to these companies.

Sovereign Wealth Funds

Nevertheless, while much recent interest has focused on the opportunities available for debt investment in the energy sector, other natural resources  strategies have attracted some investment. Fourteen unlisted funds investing in the debt of companies in the agriculture/farmland sector have closed since 2010, raising $1bn collectively. While these vehicles are typically quite small, there are some larger funds that have been interested in providing debt financing to agricultural producers, alongside equity investments. AMERRA is currently targeting $750mn for AMERRA Agri Fund III, which will seek to provide customized agriculture finance solutions – including both debt and equity positions – for agricultural producers, processors, marketers/ distributors and logistics companies operating in upstream and midstream agricultural markets across the Americas.

Only two unlisted metals & mining funds in market plan to invest in debt, both targeting approximately $400mn in institutional investor capital – perhaps partly due to concerns among investors and fund managers that the slump in the value of metals and minerals may be considerably longer lasting than that of energy. Nevertheless, among fund managers with the requisite expertise, the particular financing needs of mining companies may create attractive opportunities. Sydney-based Taurus Fund Management closed Taurus Mining Finance Fund in September 2015, having raised $683mn to invest in the debt of global emerging public and private metals & mining companies for financing or refinancing, mining project development, expansion or acquisitions.


Overall, the continued growth of interest in debt investment in natural resources companies will depend on the success – or otherwise – of the current group of funds on the road, as well as whether commodity prices begin to increase. Nevertheless, with regulation still affecting the ability of banks to address all the financing needs of natural resources companies, the next commodity boom will likely be financed in part by private capital.

Sovereign Wealth Funds

Preqin Industry News

Joe McGee takes a look at infrastructure deals completed in Africa since 2015, as well as Europe-based investors that are targeting new commitments to natural resources over the next 12 months.

Notable African Infrastructure Deals Completed since 2015

As shown on page 13, the number of infrastructure deals completed in Africa peaked in 2012, with 38 deals completed at an estimated aggregate deal value of $13.6bn, which has since fallen to 19 deals at an estimated $9.9bn in 2015. Despite this, significant amounts of capital continue to be allocated to private infrastructure deals – in 2015, 22% of completed infrastructure deals were worth over $1bn.

The largest private sector African infrastructure deal in 2015 was the formation of Lekela Power by Actis Energy III and Mainstream Renewable Power in February 2015, worth $1.9bn. Lekela Power is a renewable energy platform which aims to deliver 700-900 MW of wind and solar power. The platform will encompass three wind projects in Northern Cape, South Africa, representing 360 MW of energy. There will also be a pan-African pipeline of projects, including the 225 MW Ayitepa wind project in Ghana and 100 MW of wind and solar power in Egypt.

There have been 11 African deals completed in 2016 so far, with an estimated aggregate deal value of $8.7bn collectively. The largest of these was the successful bid for the 850MW Morocco Wind Power Project by a consortium consisting of Enel, NAREVA Holding and Siemens AG, for a total deal size of approximately €1bn, including debt. The consortium will be responsible for the development, design, finance, construction, operation and maintenance of five wind farms in Morocco, which are expected to be completed and enter operation between 2017 and 2020.

Europe-Based Investors Targeting Natural Resources

A wide range of Europe-based institutions invest in the natural resources asset class – Preqin’s Natural Resources Online currently tracks over 450 such investors. As shown on page 11, the vast majority (86%) of these institutions target energy investment; investors currently planning new investments in this area include Retraites Populaires, a Switzerland-based public pension fund, which expects to commit CHF 10mn to two new energy-focused funds over the next 12 months. One investor looking beyond energy funds is Sampension, the common management company for three Denmark-based pension funds: KP, StK:Pension and Grafi sk Pension. Sampension allocates to natural resources as part of its general alternatives allocation, to which it has a target allocation of between 20% and 25% of its total assets. The pension fund will invest between $100mn and $200mn in timberland-focused funds over the next 12 months and will continue to target opportunities globally, focusing on Australasia, Western Europe and the Nordic region.

Sovereign Wealth Funds

Although pension funds are important investors in natural resources – representing 38% of all institutional investors in the asset class – the range of institutions that invest in natural resources is much broader. European Investment Bank (EIB), for example, is an active investor in natural resources through its infrastructure allocation, investing directly and through unlisted funds. The bank is targeting natural resources investments as part of its plans within infrastructure, where typically it looks to commit €150mn to four or five funds annually. EIB invests globally, although the primary focus for investment will be Europe, with a specific focus on renewable energy, energy efficiency and sustainable forestry.

Europe-Based Investors in Natural Resources

Josh Robinson examines the current universe of Europe-based investors in natural resources, including the source of their natural resources allocations, their strategy preferences and routes to market.

Sovereign Wealth Funds

North America-Focused Infrastructure Fundraising

Jeremy Lieu provides a breakdown of the latest North America-focused unlisted infrastructure fundraising data, as well as examining the status, preferences and sizes of North America-focused funds in market.

Sovereign Wealth Funds

Emerging Markets: African Infrastructure Deals

In the fifth installment of Preqin’s series of infrastructure deals in emerging markets, Tom Begley examines the infrastructure market in Africa.

Sovereign Wealth Funds

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