Assets of sovereign wealth fund grow to $3.2trn in Q1

Aggregate assets under management by sovereign wealth funds (SWFs) hit $3.22 trillion (Dh11.8trn) in the first quarter of this year, a growth of six per cent from a year ago and 59 per cent from the 2007 figure of $2.02trn, new data showed yesterday.

SWFs have not escaped the effects of the global downturn, and some have seen their total assets fall considerably as a result of the drop in value of their investments. However, the past 12 months have seen a number of new entities emerging and the collective might of SWFs has not diminished as a result of the economic slowdown, Preqin said in a report.

This growth is primarily due to the reclassification of China's $312bn Safe Investment Company as an SWF following its purchase of a number of public and private equity interests in 2008.

Kazakhstan has also set up a new fund – the $29bn Samruk Kazyna National Welfare Fund – over the course of 2008, while Korea is one of the existing funds that has boosted the assets of its SWF over the past year.

These funds have counteracted the effects of declining total assets of some SWFs that have suffered as a result of poor investment returns in the wake of the global economic downturn.

Unlike other institutional investors such as pension plans, many sovereign wealth funds do not have future liabilities that they are obligated to pay out on, and do not have external investors able to withdraw capital at short notice.

As a result, they have long-term investment horizons, and often are relatively free to invest in risky alternative investment types.

"Although they are not seen in the headlines as often these days as a year ago, their potential importance is greater than ever. With other investors struggling to cope with huge losses, SWFs represent a vital source of capital, and have already provided much-needed finance to firms such as Citigroup and Credit Suisse," Preqin said.

"In 2009, their ability to carry on investing may see them picking up stakes in other important institutions, and will further increase their standing as investors on the global stage."

However, appetite among some SWFs for investment in Western assets, especially financial institutions, has waned as a result of the global downturn, Preqin noted.

Many have now shifted towards domestic and regional investments after suffering significant losses in recent months – especially for those that have invested heavily into financial institutions.

Even for the more niche areas of finance such as infrastructure, SWF activity is considerable. "When the enormous collective assets of sovereign wealth funds are considered, it becomes clear that that they have the potential to make a significant impact and influence on all of these asset classes," the report said.

"When the enormous collective total assets of SWFs are considered, the potential effect that these investors can have on every area of finance becomes clear.

"Other institutional investors such as pension funds have been holding back on making new investments, and with traditional sources of financing drying up, and many industries desperate for a cash injection, sovereign wealth funds will be a vitally important source of capital in 2009.

"They will also be well positioned to take advantage of opportunities that arise as a result of the global downturn, and we have already seen an interest from SWFs in alternatives funds focusing on distressed markets, and also in the private equity secondaries market," the research house said.

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