Active management and direct investments are playing an increasing role in the portfolios of sovereign wealth funds (SWFs) in the Middle East and Asia amid an unprecedented period of low interest rates.
According to a report by KMPG and the Sovereign Wealth Centre into the investment activities of SWFs, these institutional investors now account for US$5 trillion of total AUM worldwide, or just under 10% of the global economy.
The study said that while the majority of assets held by SWFs were passively deployed into traditional asset classes, the first half of 2014 saw a noticeable shift towards direct deals in alternative assets, including real estate, infrastructure, and private equity. Data from the report showed that direct deals during this six-month period rose by 21% to $51 billion compared to a year ago. It also noted that over the past six years, SWFs have doubled their allocations to private markets, while during the same timeframe public pensions have dialled back on these investments.
“While the majority of SWF funds continue to deploy their funds in bonds and global equities, a relatively low interest rate environment, continually evolving investment strategies and a growing appetite for alternative asset classes are resulting in a shift away from what has typically been a passive investment philosophy for most SWFs during the last few years,” wrote Vikas Papriwal, partner and head of markets, United Arab Emirates (UAE), KPMG, in a foreword to the report.
Notable deals for alternative asset classes made by SWFs in 2014 include the acquisition of Tokyo’s Pacific Century Place Marunouchi building for about $1.7 billion by Singapore’s GIC Private Limited. In October, it was reported that the Qatar Investment Authority (QIA) was set to buy HSBC’s global headquarters in London from Korea’s National Pension Service (NPS) for £1.1 billion ($1.7 billion).
A significant proportion of allocations made to alternative asset classes by SWFs have been via co-investments, rather than direct deals. In November, for example, the Wall Street Journal said that the Kuwait Investment Authority (KIA) would align with Australia’s Macquarie Group to invest 2.5 billion euros ($3.1 billion) into the Spanish assets of Germany energy infrastructure giant E.on.
The KPMG report also highlighted an increasing pivot to Asia by SWFs based in the Persian Gulf. “In recent years these funds, like other investors looking for yield, have turned their attention to emerging markets. In particular they’ve looked to Asia, where rising demand from China is driving secular growth,” said Victoria Barbary, director at the Sovereign Wealth Centre.
The QIA has been one of the most vocal SWFs in regards to its ambitions in Asia. In November, it announced that it would set up a $10 billion investment fund alongside China’s CITIC. The QIA’s existing Chinese assets include significant equity holdings in Alibaba Group and Hong Kong department store operator Lifestyle International Holdings.
