Dubai: A significant number of Middle East sovereign investors are looking to build their own in-house expertise in investing in alternative asset classes such as real estate and private equity, according a study of 37 institutions across the world by Invesco.
The study showed that a significant shift in asset allocation strategy is also resulting in regional sovereigns preferring to keep a larger in-house pool of experts in these asset classes.
The study revealed that over two-thirds (69 per cent) of sovereign investors indicated growth in international real estate while 61 per cent cited growth in international private equity in the last 12 months relative to their total portfolio.
Western investment sovereigns currently hold the most alternative assets with 21 per cent of all portfolio assets allocated to alternatives while those across Asia, the Middle East and emerging markets have much lower allocations.
But the greatest increase in new allocations in the last 12 months was among the Middle East (69 per cent of sovereigns cited an increase in allocations), Asia (54 per cent ) and Emerging Markets (60 per cent ). Respondents to the survey indicated that some of these funds are contemplating a move to alternative asset classes. Accordingly 86 per cent of pure investment funds – seeking diversification — have decreased their allocation to international equities and 57 per cent in international bonds, while 75 per cent have experienced a net increase in international infrastructure and 33 per cent in international commodities.
“We believe a shift is starting as they look to adopt the investment models of the West. When you consider that the vast majority of sovereign investor assets are managed by sovereigns in Asia and the Middle East, the growth in sovereign alternative investments could be substantial,” said Nick Tolchard, head of Invesco Middle East.
The survey showed that the vast majority of sovereign investors in Asia (80 per cent) and the Middle East (100 per cent) cite the biggest net increase over the last 12 months were in International real estate and international private equity. In the west, 57 per cent of sovereigns have increased allocations to home market real estate.
The shift toward in-house management was linked almost entirely to alternative investments: about 36 per cent of the investors surveyed said they had increased their own capabilities to manage alternative investments, while none of the funds said they had done the same for cash, bond or home-market equity investments.
“Clearly, some of the Middle East sovereign investors see building in-house management capabilities as an effective way of mitigating risks. Purely from an investment point of view, some of these investors see this as an opportunity to build their own direct private equity investing or co-investing with larger investors,” said Tolchard.