Rising infra allocations drive SWF collaboration

Deal scarcity and greater appetite for emerging markets is pushing sovereign investors worldwide to seek tie-ups with peers.

As the attraction of infrastructure to sovereign wealth funds (SWFs) remains strong, a growing proportion of them are looking to form alliances with counterparts to help them source deals, according to a study released yesterday.

The Invesco Global Sovereign Asset Management Study, which polled 59 institutions on their attitude to the global macroeconomic environment and its impact on investment decisions, found that SWFs were still overwhelmingly positive about the infrastructure asset class both globally and in their home markets.

But with data quality, cost, deal size and frequency, and competition among the challenges most often cited by sovereigns looking to invest in infrastructure, the survey noted an acceleration in collaboration between SWFs. This was particularly true of institutions with an allocation of more than 5 percent to the asset class, which had already teamed up with an average 2.7 sovereign investors in the past.

The main rationales behind this trend, the study said, was a desire to facilitate board approval, the will to improve pricing thanks to economies of scale and enhanced credibility, and a belief that an introduction by one sovereign to another may be reciprocated in the future.

The nature of the collaboration between sovereigns, often driven by government relationships and regional proximity in the past, was also found to be changing. Institutions were now making such decisions based to a larger extent on their counterparts’ investment expertise, with some even developing infrastructure propositions specifically to target other sovereigns.

Tie-ups were seen as all the more relevant for SWFs as many of them now showed a greater enthusiasm for investing in emerging markets, where having an insider track on projects can be crucial to source deals. This appetite was evidenced by the discrepancy between sovereign allocations to emerging markets (representing about 9 percent of total sovereign portfolios) and those specifically targeting infrastructure in developing countries (at 17 percent).

Infrastructure projects, often launched with the support of local authorities, were indeed seen as lower-risk investment opportunities than other alternative assets, while the possibility to co-invest with the likes of development banks or governments was deemed capable of bolstering a sovereign bidder’s credibility.