SWFs in Alternatives: in Pursuit of Higher Returns

Sovereign wealth funds have looked to alternatives for outperformance. Analysis of their investment shows a preference for higher-risk, higher-return strategies

Sovereign wealth funds (SWFs) are among the biggest investors in alternative assets. Cumulative allocations to private equity, real estate, and infrastructure have risen 251% over the past decade, from $205bn in 2011 to $719bn at the end of 2020.

Our new Preqin Sovereign Wealth Funds in Motion Report looks at the dynamic landscape sovereign investors are operating in and will provide unique insight into their investment strategies within alternative assets, examining historic allocations and performance, and how investment strategies are likely to adapt to the post-COVID, decarbonizing world.

Despite the huge scale of their investments and ambitions in alternatives (Fig. 1), SWFs’ commitments to private capital asset classes remain substantially below their targets. In private equity, current median allocations of 9.3% are 4.1 percentage points (pp) below the median target allocation of 13.4%. The shortfall is 3.3pp for real estate, and 3.1pp for infrastructure. 

Hedge funds are the big exception to the trend, with median target allocations decreasing in recent years, down from a high of 8.0% in 2016 to 6.1% in 2020, which is just 0.1pp over the 6.0% median allocation.

Within the asset classes, we see SWFs having a higher than average tolerance for risk and a preference for higher-returning strategies. In private equity, the focus of SWF investments has been buyouts (45% of allocations) and growth capital (19%), with only a small proportion (3%) of investments via the diversified fund of funds route, which accounts for 12% of private equity assets under management (AUM). SWF investments in venture capital account for 26% of their private equity & venture capital (PEVC) exposure. Many SWFs are now seeking new ways of gaining access – both for technology and returns – to the companies and industries they see driving long-term prosperity.

In real estate funds, SWFs have a preference for value-added and opportunistic strategies, on top of their portfolios of direct investments. In infrastructure, they are overweight in core-plus (3pp over strategy AUM) and value added (6pp over strategy AUM).

So, how has this preference for higher returns translated into performance? We have found significant differences between SWF returns from alternatives and those of other investor types. Download our report to see the bottom line.