Sovereign Wealth Funds: Worlds in Motion

The sands are shifting for sovereign wealth funds. While some are arming themselves for a technology-enabled future, others are focused on the immediate recovery from COVID-19 

The first thing most people think of when hearing ‘sovereign wealth funds’ (SWFs) is their huge reserves of capital. Preqin tracks 66 SWFs with disclosed assets under management (AUM) of $8.59tn, equal to 9.7% of the total worldwide AUM of $88.7tn.

Of equal – if less immediately obvious – importance to alternatives fund managers is SWFs’ long-term perspective. “Sovereigns are some of the most well-capitalized institutional investors globally, so they are bound to attract a lot of attention,” says James Burdett, Co-chair of Baker McKenzie's Global Funds Group. “But beyond the money they have a certain character, which is different from any other institutional investor. Sovereigns can take a longer view and historically have allocated more to illiquid assets than their private counterparts, which has served them well. They've been able to take a long-term view on value creation.”

From their origins in the oil-rich Middle East, SWFs have been established all over the world (see Fig. 1). Africa, for example, is now home to seven funds with combined AUM of more than $800bn. For some states with chequered recent history, funds are being used as part of nation-building. Rwanda’s Agaciro Development Fund was established in 2011 to “build up public savings to achieve self-reliance, maintain stability in times of shocks to the national economy, and accelerate Rwanda’s socio-economic development goals.” 

One Eye on the Future
SWFs have grown symbiotically with the asset management industry, and the relationships are continuously evolving. As the funds grow more sophisticated in their operations and objectives, their needs are changing, opening up significant opportunities for fund managers prepared to tailor a relationship to the specific SWF’s needs.

In September 2020, Abu Dhabi-based Mubadala Investment Company, the third-largest UAE SWF with £232bn in AUM, inked a $2bn 25-year investment partnership deal with Silicon Valley-headquartered technology buyout firm Silver Lake Partners. Not only did the size and horizon of the arrangement break new ground, so did its flexibility. The venture has a mandate to invest across investment structures, geographies, and industries, as well as throughout capital structures and across the spectrum of early- to later-stage opportunities. Mubadala also acquired a sub-10% stake in Silver Lake from investment group Neuberger Berman.

With the pair collaborating on investments such as media agency Endeavour, Google’s driverless technology initiative Waymo, and India’s digital infrastructure giant Jio Platforms, Mubadala will acquire unique insights into emerging technologies and business models. “Technology is the bedrock of the global economy, and fundamental to all other sectors that are being significantly digitalized. Our goal is to be well positioned to take advantage of this accelerated digital transformation and its potential,” says Khaldoon Al Mubarak, Managing Director and Chief Executive Officer of Mubadala.

Mubadala’s move is a continuation of the trend for sovereign investors to get closer to the assets, a development that has been accompanied by greater in-house sophistication and skills. Historically, SWFs had small teams making large investments, but now the funds are scaling up their human capital as well as bringing in expertise in technologies such as artificial intelligence and machine learning to help identify areas of opportunity. In part this is to enable access to early-stage technology-focused venture capital funds and direct investments, which has in the past been difficult given SWFs’ high thresholds for minimum investment. As the funds position themselves for the digital future, they will likely increase their investments in venture and growth capital. 

The Other Eye on the Present
SWFs have, of course, not been immune to COVID-19. For some, it has been an opportunity. In April 2020 Saudi Arabia’s Public Investment Fund (PIF) made a substantial investment, reportedly around $1bn, in Anglo-Dutch oil major Royal Dutch Shell, France’s Total, Equinor of Norway, and Italy’s Eni.

While PIF’s investment may have been opportunistic, some are being strategically repositioned. Turkey passed emergency legislation in April allowing its $33.5bn sovereign fund to make investments in distressed companies. The move heralded a shift to domestic investments for Turkiye Varlik Yonetimi (Turkey Wealth Fund), which was established in 2016 with a remit to invest in regional infrastructure projects. It now holds investments in Turkish Airlines, Türk Telekom, Ziraat Bank, Halkbank, Turkish Petroleum Corporation, Borsa Istanbul, as well as insurance and mining companies. Not only do SWFs have capital, they provide a mechanism for governments to intervene in economies with greater flexibility and less risk of adverse changes to credit ratings. 

While there is a reactive element to many developments in the SWF landscape triggered by COVID-19, Burdett sees advantages to this domestic focus: “If you corral state assets under one umbrella you can give the funds greater freedom to enter into commercial transactions at speed, raise capital and act as a catalyst for the development of national industries. In this sense, public policy is often being directed through the SWFs.”

The age of the oil-rich mega fund may be coming to a close. But the age of SWFs is far from over. They will adapt and evolve, building ever closer and more innovative relationships with key fund managers and financial sponsors, as well as helping nations deliver broader policy objectives with commercial rigor and more independence from day-to-day politics.

This article is the first in a series ahead of the publication of Preqin’s Sovereign Wealth Fund Review in May 2021. To register your interest in receiving a copy of the report, please contact us at publications@preqin.com.