Sizing up the SWF sector

By Paul Mackintosh - 04/11/13

Preqin’s latest report on the status of the sovereign wealth fund sector sends some mixed but mostly negative signals for the private equity industry. The 2014 Preqin Sovereign Wealth Fund Review reveals that sovereign funds globally have added over US$750 billion to their total assets under management over the last year, from $4.62 trillion in 2012 to $5.38 trillion in 2013. This compares to total capital raised by private equity funds that closed in 2012 of $311.7 billion, according to Preqin data, a figure almost unchanged since 2011. The figures are also heavily weighted towards Asia: “Asia-based sovereign wealth funds account for a significant 47% of global aggregate sovereign wealth fund assets, despite only representing 22% of sovereign wealth funds globally by number”, observes Preqin.

In some respects this growth could be seen as a positive for private equity, as SWFs are significant limited partner (LP) investors in the asset class. However, as Preqin points out, “The proportion of sovereign wealth funds investing in private equity and hedge funds has decreased over the past year, from 57% and 38% investing in private equity and hedge funds respectively in 2012 to 51% and 31% respectively in 2013. Some of this decline can be accounted for by the growth in the number of new sovereign wealth funds being established”, as new SWFs “typically will not allocate to alternative investments for a few years as they build up their investment teams and accumulate assets”.

And new SWF formation is a major factor in the growth of the sector as a whole. Preqin notes that: “Fifteen new sovereign wealth funds have been formed since 2008, with eight of these being formed in the past two years alone.” Adds Amy Bensted, head of hedge fund products at Preqin: “We are still seeing new launches of sovereign wealth funds, with many countries approving plans for new launches over 2012-13.”

Private equity general partners (GPs) therefore could have some misgivings that all this growth is not directly benefiting them. Ms. Bensted does note that: “The level of capital flowing into alternatives from sovereign wealth funds remains extremely significant. Once the newly established sovereign wealth funds become more developed, we could see a number of new allocators to the space.” True as this is, it is significant that a hedge fund expert is making the point. Private equity fund heads, who see quite a number of situations where SWFs are making direct investments – as co-investors, but also potentially as competitors – may have more ground for mixed feelings about the trend. Significantly, Norway’s Government Pension Fund, singled out by Preqin as the world’s largest SWF with $775.2 billion AUM, “an increase of $185 billion since 2012”, does not currently allocate to private equity, although it did buy 4% of the Formula One company from CVC Capital Partners.