Are SWFs crying wolf?

Sovereign wealth funds are sounding a pessimistic note on core infra. But, while they’re advocating new strategies, they don’t seem ready to jump ship just yet.

To the extent that an investment organisation can be chilled out, you’d expect sovereign wealth funds to rank first on the Zen scale. True, some of them, particularly in the Middle East, have probably received less money of late. But with limited or no liabilities, SWFs are spared the frantic efforts other LPs have been making to match future payouts. On paper at least, their game is resolutely long-term, focused on growing the national kitty for future generations.

Yet, SWFs are not so sanguine. Early this month, the Abu Dhabi Investment Authority suggested that an upsurge in investor interest and capital flows had resulted in a drastic increase in competition for assets, pushing up prices and depressing returns. Singapore’s GIC then said it had to be “prepared for periods of underperformance relative to market indices, some even for a stretch of several years”, amid protracted uncertainty and low returns in many markets.

China Investment Corporation made a similar complaint this week, attributing deep roots to today’s high volatility and political uncertainty globally. “The multiple rounds of quantitative easing by key economies and the weak recovery in developed economies during the eight post-crisis years have led to keen competition for capital and to low returns,” it said.

These institutions’ diagnosis is no different from the one formulated by economists and financiers at large, or, indeed, infrastructure fund managers: the likes of 3i and Partners Group have been talking about the dangers of an industry awash with capital for several years already. Neither can we conclude that a single, discrete event, occurring sometime this month, is leading SWFs to formulate such concerns in accord. It’s only coincidental that all three institutions are releasing annual reports at the same time; their worries have probably been harboured for some time.

What the negative tone of their communiqués signals is a shift in strategic thinking. ADIA, for instance, says heightened competition is prompting SWFs to look at investment platform opportunities, make a push into emerging markets and consider backing assets that blur the lines between infrastructure and private equity. CIC wants to evade competitive pressures by making more direct deals and focusing on the US. GIC advocates prudence in the face of generalised complacency and says risk models need to be recalibrated.

Whether SWFs are actually practising what they preach is an open question. Over 2016, CIC consciously increased its exposure to “high-quality core infrastructure assets” – precisely the type of assets that have seen their returns lowered by increased competition. The 16 direct investments made by its private capital arm, totalling $5 billion, included National Grid's gas distribution network in the UK, a natural gas pipeline in Brazil and Port of Melbourne. ADIA, which says it mainly targeted opportunities outside auctions last year, did make a $320 million punt on Greenko Energy Holdings, an Indian developer. But it also plugged £621 million into the UK’s Scotia Gas Networks, which it bought as part of a competitive auction.

That such discrepancies exist is not so surprising. SWFs are among the institutions that benefit from the lowest cost of capital, so they’re probably not going to be rushing to desert core infrastructure. What competition is certainly prompting them to do, however, is put more effort into optimising their assets, both operationally and financially. GIC, for example, is a shareholder in Budapest Airport, which lowered its financing costs by sealing a €1.4 billion refinancing this week. Despite their notes of caution, SWFs’ involvement in core infrastructure is undoubtedly for the long haul.

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