Friend or foe?

When assets prices go through the roof, cash is king. And despite the emerging market gloom, sovereign wealth funds (SWFs) continue to have a lot of it.

Having added about $927 billion to their assets under management between 2013 and 2015, these state-backed institutions are now overseeing a record $7.21 trillion, JPMorgan Asset Management estimates. The company reckons they are now looking after more money than hedge funds and private equity firms, which manage a combined $6.8 trillion.

What’s more, SWFs are allocating an increasing share of this growing war chest to alternative strategies. Unbound by the same asset-liability matching requirements as traditional LPs, they can factor in a lower cost of capital when bidding for assets. This is all the truer for the largest of them, which are striving to cut down on fees by building direct investment teams.

Game over then? Well, not really. As it turns out, SWFs don’t always win: many thought Malaysia’s Khazanah Nasional had a done deal when it offered €750 million for Globalvia last summer – only to see Spanish-based Bankia and FCC, current owners of the concessions business, sell the asset to Canada’s OPTrust, the Netherlands’ PGGM and the UK’s USS last month after the pensions matched the fund’s bid.

1MDB, another Malaysian state-backed fund, is divesting assets rather than hunting for them. In November, it sold its power assets to China's CGN for $2.3 billion. The institution’s troubles are largely down to gross mismanagement; the Prime Minister also stands accused of siphoning off $700 million from the fund’s coffers. But other SWFs could soon be offloading assets out of choice rather than necessity: favouring good returns over yield, they probably see today’s environment as a conducive one for lucrative exits.

Some SWFs still manage to seal headline deals. But that is mostly true of institutions of a certain provenance and scale: when China Investment Corporation (CIC) says it is interested in investing €1 billion in the Grand Paris renewal project, for instance, it makes for a good story. And given the size, timeframe, risk and political dimension of such schemes, it is not obvious CIC’s jumping in a space that would have otherwise been eagerly taken by an insurer or pension fund.

On more classic assets, sovereign funds more rarely go at it alone. While at times relatively sizeable, their direct investment teams hardly have the experience and span to cover the globe. They also prefer taking minority stakes rather than gaining full control. As a result, they tend to partner with other investors at least as often as they compete with them. In October, ADIA led a $265 million fundraising round for India’s ReNew Power alongside Goldman Sachs and the Global Environment Fund, for instance.

And that is only the tip of the iceberg: most SWFs actually lack the resources to do the job themselves and it is not so clear they are in a rush to remedy this straight away. The prospects are thus good for managers capable of tailoring products to their needs. Infrastructure Investor understands, for instance, that the Future Fund earlier this year launched a partnership with a fellow Australian institution to target Asia-Pacific assets. To the extent that this structure participates in deals alongside the latter’s other clients, limited partners also stand to benefit: a lower average cost of capital and increased scale can help them win more auctions.

There’s another way in which the rise of SWFs can potentially benefit other LPs. It recently emerged that the Korea Investment Corporation – a Seoul-based sovereign wealth fund – could be part of a $2 billion scheme to help Korean institutional investors deploy their money into overseas assets. Asian LPs remain largely underinvested in infrastructure. As they contemplate their next move, playing ball with some of the world’s most sophisticated sovereigns may not be such a bad idea.