Sovereign wealth funds: Size matters

AN LP was assessing the prospects for co-investment alongside a new fund. “Some of the Canadians need to commit at least $100 million per deal,” he observed. “And then GIC, they will do anything.” There was no agenda, merely a statement of fact: GIC Private, arguably the most sophisticated LP in Asia, has built up the bandwidth and expertise to address seemingly any private equity investment opportunity. In addition to backing all manner of funds, it is just as likely to be name-checked leading rounds for US start-ups as co-investing in Asia buyouts.

GIC offers little official insight into the size of its alternatives activities – the most recent annual report put the private equity and real estate allocations at 9% and 7%, respectively, as of March 2017. Based on independent assessments that put the sovereign wealth fund’s assets at $350 billion and the 11-15% allocation disclosed in its policy portfolio, it could have $31.5 billion in private equity now with scope to add another $21 billion.

GIC has been at the forefront of an aggressive push into alternatives by sovereign wealth funds (SWFs). A recent State Street Global Advisors report notes that in 2002 there were 21 funds with total assets of $790 billion. As of 2016, 11 out of 37 funds were sitting on in excess of $100 billion apiece and total assets came to $6 trillion. Of the 37, 30 had exposure to alternatives, up from nine in 2002. Their $1.6 trillion in private markets holdings accounted for 15% of the entire global alternatives market.

A PwC report on the rising attractiveness of alternative asset classes for SWFs offers similar numbers regarding growth – total assets reached $7.4 trillion in 2016, of which $1.68 trillion was in alternatives – but a different perspective as to what might happen next. 

Both State Street and PwC highlight how lower commodity prices have put pressure on certain SWFs, prompting governments in some oil-producing countries to withdraw capital in order to tend to public debts. State Street sees this as contributing to the end of rapid asset accumulation among SWFs, citing a slowdown in the growth of foreign exchange reserves, the greater fiscal burden of aging populations, and the fact that new additions to the SWF group have been few and small in size as other factors. PwC, however, is more bullish, predicting further growth in the size and diversity of these entities.

The shift into alternatives – chiefly at the expense of fixed income – continued despite the commodity price pressures. There is no reason to believe strategies will change. Institutional investors are pouring capital into alternatives as they pursue returns in a low-interest rate environment. If and when the status quo changes, the asset class will still appeal to SWFs for its diversification, its ability to serve as a hedge against inflation, its lack of synchronicity with other market cycles, and the long-dated, yield-generating characteristics of segments such as infrastructure.

However, State Street does raise the prospect of allocations to alternatives hitting a peak. It gives three reasons: should inflows to SWFs slow, illiquid investments could become problematic; rising interest rates will lessen the attractiveness of higher risk assets; and a shortage of institutionalized vehicles capable of managing this capital. This last point is most interesting.

The notion that demand for exposure to alternatives exceeds the supply of qualified managers is not new – indeed, it is often cited as one of the challenges for LPs looking to boost their allocations to Asian private equity. Should SWFs run into this obstacle, it is difficult to predict how they might respond, given they are a highly heterogeneous form of institutional investor. Much is made of the prospect of them setting up their own investment units and going solo, but it requires a substantial ramp-up in internal capabilities and perhaps a string of governance reforms as well.

GIC started out in 1981 with a few officers seconded from the Monetary Authority of Singapore and its competencies have grown in step with its asset base. While a number of other SWFs have taken the leap or are in the process of leaping – and the existence of development templates might make it easier – evolution takes time. 

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• Topics
• Southeast Asia
• LPs
• Fundraising
• Singapore
• GIC Private
• Sovereign wealth fund
• Direct investment
• Co-investment