GIC looks to PE to drive returns amid rising inflation

The sovereign wealth fund, which claims to have invested well over USD 100bn while independent assessments put its wealth at more than USD 300bn, had 17% of its assets in private equity as of March 2022, up from 15% a year earlier. Private equity is now the second-largest portfolio component after bonds and cash. Over the same period, real estate rose from 8% to 10%.

GIC said the shifting allocations – developed and emerging markets equities fell by one percentage point in each case, to 14% and 16% - were driven by a combination of recent public market volatility and a longstanding goal to increase private equity and real estate exposure. Robust deal activity and strong asset performance were also contributing factors.

At the same time, it emphasised the importance of portfolio diversification and alternative scenario planning in the face of resurgent inflation. Real estate and infrastructure offer protection because they generally outperform nominal bonds in a high-inflation environment. Private equity, meanwhile, offers growth so that returns do not trail inflation.

GIC’s 20-year annualised return for the 12 months ended March was 4.2%, down from 4.3% the previous year, but over and above the global inflation rate. This suggests a sustained rebound from the immediate impact of COVID-19, which contributed to a 2.7% return in 2020.

Chow Kiat Lim, CEO of GIC, noted in the latest annual report that the sovereign wealth fund was established in 1981, coinciding with 10% inflation in the US and long-term interest rates of 14%. Both then spent 40 years in secular decline, latterly helped by globalisation-linked productivity gains, favourable demographics, and central bank efforts to control inflation.

With those forces now dissipating, “disinflationary tailwinds may be turning into inflationary headwinds.” A portfolio fully invested in bonds in 1981 would have returned 3.4% in real terms. Today, with continued low interest rates, the same hypothetical portfolio would earn just enough to beat inflation, Lim said.

“Adding on riskier assets goes some way towards securing better real returns, but one must then contend with stretched valuations along with late-cycle dynamics that can impact profits. There are no straightforward solutions,” he observed.

Lim also highlighted the risks posed by geopolitics, with income inequality polarising countries around the world and intensifying rivalries between key economies contributing to an increasingly fractured global power structure. This may lead to a decoupling of the global economy, which would increase business costs and investment risk and reduce investment returns.

Separately, GIC is increasing its focus on climate change and low-carbon transition with the establishment of a dedicated sustainability office, which will push to integrate sustainability into all our investment and corporate processes.

GIC’s investment framework comprises three building blocks: a reference portfolio, currently 65% global equities and 35% global bonds, based on long-term risk appetite; a policy portfolio that offers balanced exposure across different asset classes and envisages an 11-15% private equity allocation; and an active portfolio comprising strategies in which managers add value to the policy portfolio while broadly maintaining the same level of risk.

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• Topics
• Southeast Asia
• LPs
• Performance
• Singapore
• GIC Private