Sovereign wealth funds have historically been an important source of capital for infrastructure development both domestically and internationally. As such, according to Preqin data 61% of all sovereign wealth funds actively invest in the infrastructure asset class. The attraction of infrastructure investment for sovereign wealth funds can be split into two main areas of interest: the traditionally attractive aspects of the asset class, such as long term inflation-linked liability matching, and the developmental goals that these investors have as part of their investment mandate. For these two reasons, sovereign wealth fund interest in infrastructure has increased as the asset class has become more established.
Sovereign wealth funds often have larger than average balance sheets, with the average assets under management for such LPs standing at $82.3bn. As a result, sovereign wealth funds tend to be more disposed toward direct infrastructure investments than other types of investor. Seventy-one percent of sovereign wealth funds actively investing in infrastructure invest via direct strategies, whereas only 51% pursue commitments to unlisted funds. Because sovereign wealth funds often have larger capital structures, they often have established internal investment teams which can mitigate their reliance on a fund manager’s expertise, allowing them to invest directly in assets.
The Kuwait Investment Office (KIO) recently announced plans to invest up to $5bn in UK infrastructure assets. The sovereign wealth fund will target heavily regulated, cash generating assets that are already operational, as shown by its recent attempt to acquire Severn Trent alongside Borealis and Universities Superannuation Scheme. Similarly, other large sovereign wealth funds have been actively undertaking infrastructure investments for many years, such as Government of Singapore Investment Corporation, Abu Dhabi Investment Authority and China Investment Corporation. The rationale for this strategy is often cited as providing an alternative to the increasingly weak returns offered by fixed income allocations, as well as steady protected capital growth, which is the primary function of most sovereign wealth funds. In addition, infrastructure offers a good match for any long-term capital outflows that these LPs may need to cover in line with their mandate.
Developmentally-minded sovereign wealth funds can also leverage the asset class, not only to provide relatively low-risk, long term capital growth, but also to meet their domestic development requirements. The National Pensions Reserve Fund, an Irish sovereign wealth fund, has recently switched its infrastructure investment strategy away from commitments to internationally-focused unlisted funds towards debt and equity provision for domestic infrastructure projects. The primary driver behind this has been the shift towards developmental efforts to stimulate and promote investment in Irish infrastructure.
Infrastructure therefore provides a two-fold opportunity for Sovereign wealth funds investing both internationally and domestically. This will likely result in more Sovereign wealth funds carving out both domestic and international allocations to infrastructure in future.