Infrastructure Remains the Most Targeted Asset Class among Sovereign Wealth Funds

by Ibrahim Yildiz

  • 21 May 2018
  • INF

Infrastructure investments are targeted by the majority (64%) of sovereign wealth funds (SWFs), which look to deploy their significant assets under management (AUM) in projects with the aim of stimulating their domestic economies and meeting their development objectives. Furthermore, the inherent long-term lack of liquid assets tied to infrastructure projects and lower liability risk complement the investment horizons of SWFs and their longer-term objectives.

The majority (92%) of SWFs gain exposure to the asset class through direct investments. With their large AUM, these state-owned investment vehicles allow governments to achieve economic and social development goals through the construction of new infrastructure assets, and the expansion and modernization of current ones. For example, in December 2017, National Development Fund of Iran approved the transfer of $500mn for the creation of a rail leasing company that will provide financing to local investors in the country’s rail projects.

Almost two-thirds (63%) of SWFs access the asset class through unlisted funds, which can enable such institutions to benefit from building relationships with fund managers and further diversifying their portfolios. Sovereign wealth funds particularly active through unlisted funds include Alaska Permanent Fund Corporation, which previously committed $500mn to Global Infrastructure Partners III, the largest unlisted infrastructure fund closed to date. Another notable example involves Saudi Arabia’s Public Investment Fund, which was announced as an anchor investor to Blackstone Infrastructure I in May 2017 with a $20bn commitment.

A key trend in infrastructure among SWFs over the years has been an increasing focus on foreign investments, which are currently targeted by 73% of institutions active in the asset class. This includes GIC, which in March 2017, through a joint venture with CPP Investment Board and The Scion Group, acquired three US student housing portfolios for $1.6bn. In January 2018, through the same joint venture, these investors acquired another US student housing portfolio for $1.1bn.

Interest in emerging markets is also on the rise, likely due to sovereign wealth funds supporting domestic infrastructure projects, with Asia home to 37% of sovereign wealth funds that invest in the asset class. In September 2017, Temasek Holdings entered into a collaborative initiative with EQT to identify infrastructure investment opportunities in Southeast Asia, India, Korea, Japan, Australia and New Zealand; the partnership allows Temasek to offer their specialized expertise and regional network, while EQT can provide an additional stream of capital into these developing economies.

Infrastructure remains an important component in the portfolios of many SWFs due to the attraction of strong risk-adjusted returns and inflation-hedging characteristics on offer. However, the asset class continues to present challenges in the form of increasing competition for assets and the resulting effect of rising asset prices, which are likely to eat into eventual net returns. Sovereign wealth funds both active in and looking to enter the asset class are presented with fewer opportunities to acquire core infrastructure assets and may need to expand their reach outside the developed markets in search of relative value. However, with a vast amount of resources at their disposal and growth and urbanization trends becoming more pronounced over time, SWFs are well placed to provide much-needed capital for further investments in infrastructure. 

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