Wealth of sovereign wealth funds (SWFs) jumped by 16 per cent or over half a trillion dollars in 2011-2012 to $4.62 trillion despite widespread economic uncertainty regarding the sovereign debt crisis, volatility in many world financial markets and underperformance of certain asset classes, said a report.
Preqin, a research and consultancy firm focusing on alternative asset classes, said in a recent study that the five largest sovereign wealth funds that invest in private equity funds have combined assets under management in excess of $2.2 trillion.
The largest sovereign wealth fund active in the private equity space is Abu Dhabi Investment Authority (Adia). The Abu Dhabi fund controls an estimated $627 billion and has an allocation range to the private equity asset class of between two per cent and eight per cent of total assets under management. Elsewhere, Kuwait Investment Authority is also a prolific investor in private equity. It currently allocates 10 per cent of its $296 billion under management to private equity, across a diverse range of strategies and geographies, making it a significant potential source of capital to fund managers worldwide.
Preqin said more than half (57 per cent) of sovereign wealth funds are known to invest in the private equity asset class. Many of these institutions invest in the asset class through funds, with 46 per cent opting to gain exposure to the asset class via this method. A further
11 per cent gain exposure to private equity through direct investments.
Bahrain’s Mumtalakat Holding Company is one such example; it has a dedicated direct investments team and has exposure to numerous industries, including telecommunications, energy and financial services. An additional 3 per cent of sovereign wealth funds worldwide are considering making an initial investment in the private equity asset class.
In general, larger sovereign wealth funds are more likely to invest in private equity funds. Of sovereign wealth funds with total assets of
$250 billion or more, a significant 83 per cent invest in private equity funds, whereas this figure drops to 55 per cent for SWFs with between $10 billion and $49 billion. Smaller institutions, with total assets of less than $1 billion, are far less likely to invest in the asset class; 25 per cent of the sovereign wealth funds with total assets under management that fall into this category invest in private equity funds.
North America remains a popular investment choice for sovereign wealth funds with exposure to private equity, with 76 per cent having a preference for the region. This is unsurprising given the maturity and depth of the private equity industry in the US, which is home to numerous fund managers and varied investment possibilities.
Europe-focused funds are a preference for 72 per cent of SWFs investing in private equity, while Asia-focused vehicles are stated as a preference by 62 per cent. Many sovereign wealth funds take a global approach to the asset class, for example Qatar Investment Authority aims to hold a truly geographically diverse portfolio of investments, investing in funds focusing on opportunities across North America, Europe, Asia and the Mena region, as well as emerging markets.
It prefers to invest in funds with an overall size of more than $500 million, typically committing no more than 5 per cent of this amount.
Despite the relatively large number of sovereign wealth funds based in Mena, the region is a less favourable choice for such institutions investing in private equity. Thirty-four percent have a preference for investing in Mena, with the vast majority based in the region themselves, and typically invest in the asset class as a means of facilitating the development of surrounding areas.
Mubadala Development Company (MDC), for example, does not view itself as a traditional private equity investor, but instead chooses to opportunistically invest in private equity funds and direct investments that focus on its strategic objectives and the development of Abu Dhabi.
It is evident that sovereign wealth funds continue to have a strong interest in private equity and view the asset class as presenting favourable long-term investment opportunities. Many sovereign institutions invest in the asset class through private equity funds, in addition to direct investments in line with their strategic aims.
Over recent years, the number of sovereign wealth funds seeking to hold more diverse portfolios of investments, by both strategy and geography, has risen. Although the financial markets remain turbulent, such institutions represent a significant amount of the capital invested in private equity and are likely to continue to allocate increasing amounts of capital to the asset class going forwards.
Aggregate SWF assets under management 2008-2012
(Figures in trillions)