Dubai: Sovereign wealth funds (SWFs) are increasing their exposure to listed assets as private market deal activity slows, according to research from the International Forum of Sovereign Wealth Funds (IFSWF).
A recent report on global SWFs by Sovereign Investment Lab at Bocconi University, found that sovereign wealth funds’ (SWFs) appetite for real estate and infrastructure deals slowed in 2017. The number of investments in unlisted assets completed in 2017 fell to 184, from 196 in 2016, while the number of listed investments rose to 119 in 2017, versus 94 in the previous year.
While SWF investors are increasingly looking at co-investment strategies with other investors, including their peers and private equity (PE) firms on investments, the traditional PE way of limited partners (LPs) entrusting money with general partners (GPs) is on the wane. In consumer goods and services companies, SWFs are buying fewer listed stocks, choosing to invest at earlier stages alongside PE firms.
“We expect to see continued partnerships with third-party investors as a more controlled way for funds to get exposure to earlier-stage equities. But over the longer term, SWFs will have to deal with the disruption of an increasingly uncertain macroeconomic environment,” said Bernardo Bortolotti, Director of the Sovereign Investment Lab.
Data from Sovereign Investment Lab also shows in 2017, SWFs completed more direct equity investments than they did in 2016 (303 versus 290), but that the value of these has largely stayed flat: $52.6 billion (Dh193 billion), compared to 2016’s $51.4 billion.
Increasingly, SWF’s investment strategies show their preference to listed equities. According to Invesco’s recent Global Sovereign Asset Management Study, nearly half of sovereign investors are now incrementally or materially overweight in equities.
The study showed average allocation to listed equities have increased to 33 per cent this year from 29 per cent in 2017. The increase in equity allocations has been driven by a number of factors, including the equity bull market and higher returns. On average, equity returns were 8.7 per cent among respondents, which significantly supported strong outcomes at portfolio level (9.4 per cent in 2017, up from 4.1 per cent in 2016).
Falling out of favour with SWFs is likely to have serious implications for the region’s PE industry plagued by a crisis of confidence triggered by allegations of fund misuse, co-mingling of funds and poor governance standards at Abraaj, the region’s largest private equity firm.
The PE industry in the GCC has been on a gradual recovery mode since the global financial crisis. While investment volumes have picked up again after a partial slowdown in 2016, with a total of $3.3 billion (Dh12.1 billion) in 2017, average deal multiples appear to be quite sustained compared to pre financial crisis levels, according to recent data from Boston Consulting Group (BCG).
Going forward, with reduced allocations from SWFs, institutional investors and reluctance banks to lend to the PE firms, region’s private equity fund raising is expected to slow down significantly.
Industry insiders say fund raising in private equity is very sensitive to news relating to the industry. “Clearly the Abraaj case is going to have a big impact on limited partners who provide money to general partners. Leverage is also going to become expensive and scarce, ultimately eroding multiples,” said the CEO of a regional private equity firm.