Sovereign Wealth Funds Investing in Private Equity

by Louise Weller

  • 17 Apr 2012
  • PE

Sovereign Wealth Funds (SWFs) have seen their total assets under management grow significantly over the past few years. In 2008, the aggregate assets under management of SWFs worldwide stood at $3tn, whereas now in 2012, the figure stands at over $4.6tn. These institutions typically take a long-term approach to their investments and therefore alternative asset classes, such as private equity, continue to appeal to this investor group.

Over half (57%) of SWFs are known to invest in the private equity asset class, with 46% of SWFs gaining access to the asset class through funds commitments, while a further 11% choose to make strategic direct investments. An additional 3% of SWFs are considering making a maiden allocation to private equity, as a means of diversifying their existing investment portfolios. Forty percent of SWFs do not invest in private equity. There are various reasons for this including issues with liquidity requirements and a lack of expertise and resources to operate effective private equity programmes.

In general, the larger the SWF, the more likely it is to invest in private equity. Eighty-three percent of SWFs with total assets under management   of more than $250bn invest in the asset class, compared to just 14% with total assets of between $1bn and $9bn. The five largest SWFs that invest in private equity have combined total assets under management in excess of $2.2tn, three of which are based in Asia and two in MENA. Abu Dhabi Investment Authority (ADIA) is the largest sovereign wealth fund known to invest in private equity, with total assets of approximately $627bn and an allocation to the asset class of between 2% and 8% of total assets.

Buyout funds continue to attract a great deal of attention from SWFs with 79% of those investing in private equity stating a preference for this fund type. Recently, Government of Singapore Investment Corporation (GIC), China Investment Corporation (CIC) and Future Fund reportedly committed a combined total of $900mn to Apax Europe VIII, which held a first close last month on €4.3bn and has an overall target size of €9bn. State Administration of Foreign Exchange (SAFE) is understood to have made one of the largest known commitments to a global buyout vehicle, when it committed $2.5bn to TPG Partners VI. Fifty-nice percent of SWFs investing in private equity have an appetite for venture funds, while distressed private equity is appealing to 38% of SWF’s investing in the asset class given the continued volatility in the financial markets of late.

Geographically, North America is a popular region for SWFs, with 76% of those investing in private equity having a preference for this region. Despite the fact many SWFs are based in MENA, the region is a less favourable investment choice; 34% of SWFs investing in private equity have a preference for this region, the majority of which are also based in MENA.

It is evident that SWFs consider the private equity asset class to present favourable long-term opportunities as they seek to hold diverse investment portfolios. Such institutions represent a significant amount of capital invested in the asset class and although financial markets remain turbulent, SWFs are likely to maintain a strong interest in private equity and continue to allocate further capital to the asset class going forward.

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