The natural resources asset class continues to feature in the majority (59%) of sovereign wealth funds’ (SWF) investment portfolios, rising from 47% and 55% in 2016 and 2017, respectively. Many SWFs, particularly those in the Middle East, have created significant revenues from the extraction of hydrocarbons (such as oil and natural gas), while these funds have also recognized the value of additional natural resources investments not only in energy but in agriculture/farmland, metals & mining, timberland and water.
Eighty-four percent of SWFs gain exposure to natural resources through direct investments, while a growing proportion access the market through unlisted funds. Australia’s Future Fund made several investments in the asset class in 2017, including its acquisition of the 200 MW Silverton Wind Farm Project in western New South Wales alongside AGL Energy and QIC.
All SWFs currently investing in natural resources have a preference for energy. Continued appetite for such investments partly reflects the amount of viable opportunities available in the market, which typically span a wider range of assets compared to other industry sectors. In October 2017, Public Investment Fund (PIF) and SB Investment Advisers, via its $100bn SoftBank Vision Fund, signed a memorandum of understanding to create the ‘Solar Energy Plan 2030’, a new framework for developing the Saudi Arabian solar energy sector. The new initiative will see the development of the Kingdom’s first 3 GW solar generation capacity in Saudi Arabia, which will be realized in 2018.
The water sector is also being targeted by a growing proportion of SWFs active in the asset class. With several cities such as Cape Town and São Paulo at risk of running out of fresh water in the next 12 months, this figure is expected to rise even further over the coming year.
The proportion of SWFs with a preference for agriculture/farmland investments has also risen from 54% in 2017 to 62% in 2018. A quarter of investors surveyed by Preqin in December 2017 believe such investments currently present the best opportunities in the market. Demand for food continues to accelerate, driven by growing populations such as the BRIC nations. For example, Russian Direct Investment Fund and TH Group, Vietnam’s largest agricultural conglomerate, entered into a bilateral agreement in September 2017 to jointly invest in dairy farming and milk processing projects in Russia.
The majority (53%) of SWFs target investments on a global basis, while the same proportion also look to invest in emerging markets. Middle East-based funds, such as Dussur, are well placed to develop these types of projects locally through direct investment. In May 2017, the Saudi Arabian SWF signed a joint venture agreement with GE, worth more than $270mn, which will help the SWF to localize gas turbine manufacturing and establish a global industrial supply chain for the energy sector.
Many SWFs maintain a long-term allocation to real assets, in line with the long-term objectives of these investors. SWFs continue to diversify their portfolios away from an overreliance on energy, which may result in further investment across other sectors within the natural resources industry.
For more information, please visit www.preqin.com/swf.