Sovereign Wealth Funds and Their Growing Influence in Private Equity

by Ibrahim Yildiz

  • 02 May 2018
  • PE

While the inherently illiquid nature of private equity prevents many institutional investors from entering the asset class, the significant sums of capital and long-term investment approach of sovereign wealth funds (SWFs) can remove such barriers. Compared with smaller investors, which must mitigate for short-term liabilities, SWFs’ unique characteristics allow them to allocate larger proportions of their portfolios to private equity.

Sixty percent of SWFs invest in private equity, which has remained around the same level as 2017, but represents an increase of 13 and five percentage points from 2015 and 2016 respectively. This reflects the growing appetite for private equity and suggests that SWFs, having gained experience from investments in traditional asset classes, are now targeting private equity in search of greater returns.

Venture capital and buyout funds are targeted by the largest proportions of SWFs (72% and 70% respectively). SB Investment Advisers’ $100bn SoftBank Vision Fund, which targets leveraged buyouts among other strategies, has already secured $45bn in commitments from Public Investment Fund (PIF) and Mubadala Investment Company (MIC) – a further reinforcement of the vast amount of resources at the disposal of these investors.  

Over three-quarters (76%) of SWFs target investments in Europe, with many established GPs based in the region. A similar proportion operate a global mandate in search of access to a wider range of fund strategies and opportunities, while a greater proportion target Asia over North America in search of value outside the developed markets.

In recent years, the private equity secondary market has seen increased activity from SWFs, many of which look to utilize the market as a mechanism for restructuring portfolios that have become unbalanced. Some SWFs have also used the secondary market as an opportunity to access fund interests further along in a fund’s lifecycle at a reduced price, while also mitigating the J-curve effect.

Some of the more prominent SWFs have taken further steps to maximize exposure to the private equity industry by providing services to other investors as a GP. In April 2017, Mubadala Capital, an investment arm of MIC, secured a $2.5bn investment from Ardian. This will comprise a $1.75bn investment in primarily North America-focused buyout and growth funds, as well as direct investments, and a 50% stake in a new $1.5bn private equity fund to be established by the SWF. In addition, PIF launched a $1bn fund of funds vehicle in October 2017 with the objective of providing support to domestic SMEs.

SWFs have long been recognized as a major source of capital for private equity GPs in an increasingly competitive fundraising market. As the market has developed over the years, so too has appetite from such investors in the asset class: SWFs have significantly increased their average target allocation from 7.8% of total assets in January 2013 to 16.6% in January 2018. These investors continue to break barriers, at times acting as cornerstone investors in funds, such as the $100bn SoftBank Vision Fund.

With plenty of capital and resources at their disposal, some SWFs have started to expand their reach within the asset class, offering GP-like services to other investors. Should this trend continue, fund managers face the additional challenge of competing against these funds, as well as their usual competitors, in order to secure institutional capital and source the most attractive opportunities.

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