Would Sovereign unity lead to increased private equity activity?

by Dami Sogunro

  • 16 Jul 2009
  • PE

Over recent weeks, the Korea Investment Corporation (KIC) signed two separate memoranda of understanding with Khazanah Nasional and the Queensland government owned QIC to jointly explore investment opportunities. As a result, a sovereign wealth fund investment coalition has indirectly been formed. In Q3 2008, KIC appointed Lee Dong-ik as head of its newly created alternative investment team and the sovereign wealth fund recently received a USD 3 billion cash injection from the South Korean government and plans on investing USD 1 billion into alternatives, inclusive of private equity.

This cash infusion gives KIC the ability to resume making overseas investments, after it had ceased making investments of that nature as a result of suffering losses. By merging resources with the Australian and Malaysian organizations, KIC is looking to explore the possible opportunities that investment and business collaboration could bring. KIC will look to invest in private equity funds globally and will prefer to invest in buyout and mezzanine vehicles.

Reorganization and increased strategizing by sovereign wealth funds could be a sign of an imminent rise in the level of investment in alternatives, such as private equity, made by this group of investors. In recent months, signs of this would be China Investment Corporation (CIC) reshuffling its investments department and also creating a new position of ‘head of private equity’, Alaska Permanent Fund Corporation setting aside USD 500 million to invest in private equity in 2010, and National Social Security Fund – China (NSSF) seeking approval to invest in foreign private equity funds. NSSF is currently only allowed to invest 10% of its assets in private equity, which has so far been invested solely with local fund managers.

As a result of the financial crisis, it is expected that sovereign wealth funds will be in search of more investment diversification, moving away from the more traditional/liquid asset types and taking advantage of the discounted prices of illiquid assets such as private equity. The next couple of years will be revealing, but it is more likely than not that sovereign wealth funds will pay more attention to the private equity asset class.

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