Sovereign Wealth Funds Investing in Private Equity – September 2013

by Raisah Yusuf

  • 17 Sep 2013
  • PE

Sovereign wealth funds investing in private equity currently hold over $4.4tn in assets under management. Given the nature of these institutions and their approach to long-term investments, alternative assets, particularly private equity, continue to appeal as a channel for investment. The top three sovereign wealth funds tracked by Preqin’s Investor Intelligence service based on assets under management are: Government Pension Fund – Global, based in Norway; China Investment Corporation; and State Administration of Foreign Exchange, based in China. These three alone have an aggregate $1.9bn in assets under management.

Perhaps reflecting the fact that sovereign wealth funds’ typical revenue stream stems from commodity exports, such as oil and gas, the majority of this investor type is located in the Middle East (31%). This is followed by the Far East and North America (14% each). Eleven percent of sovereign wealth funds are located in Greater China. When investing in private equity, the majority of sovereign wealth funds prefer to invest in developed markets, with North America (69%) and Europe (66%) at the top of the list. However, funds focusing on emerging markets are also highly sought after, attracting 60% of sovereign wealth funds. Within emerging markets, just over half (51%) of sovereign wealth funds prefer to invest in Asia-focused vehicles, 34% specifically favour funds targeting investment in Greater China, and 31% have a preference for Middle East-focused vehicles. Private equity funds with a focus on South America and South Asia are preferred by 29% and 26% of sovereign wealth funds respectively.

In terms of fund preferences, buyout and venture capital vehicles are the most sought after fund types among sovereign wealth funds, with a respective 71% and 68% of sovereign wealth funds expressing a preference for these strategies in particular. This is followed by growth (60%) and expansion/late stage (51%) vehicles. Over a third of sovereign wealth funds prefer to invest in distressed debt vehicles (37%). A third of sovereign wealth funds will commit to a pure first-time fund, and just over a fifth (22%) will commit to a fund raised by a spin-off management team. Just under two-thirds (62%) of sovereign wealth funds will commit to a fund before it has held an initial close, and a further 15% would consider doing so.

Many sovereign wealth funds around the world have been targeting opportunities in the private equity space in 2013 so far, and this activity looks set to continue. Korea Investment Corporation is planning to drastically increase its allocation to private equity over the next three years, from 1.9% of total assets to up to 8%. Alaska Permanent Fund Corporation recently awarded a separate account mandate to Carlyle Group, which will focus on natural resources. Elsewhere, New Zealand Superannuation Fund committed NZD 40mn to Pioneer Capital Partners II, a growth vehicle that will target investment opportunities in New Zealand.


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