When assets prices go through the roof, cash is king. And despite the emerging market gloom, sovereign wealth funds continue to have a lot of it.
Having added about $927 billion to their assets under management between 2013 and 2015, 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, sovereigns 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, sovereigns 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 this week after the pensions matched the fund’s bid.
1MDB, another Malaysian state-backed fund, is divesting assets rather than hunting for them. It is now hoping to get about $3 billion for its energy unit. The institution’s troubles are largely down to gross mismanagement; it doesn’t help that $700 million have mysteriously disappeared from its coffers, with the Prime Minister accused of channelling the money to his personal accounts. Still, it shows that sovereigns sometimes have their own particular issues to deal with.
Sure, some of them still manage to grab the headlines. But it’s mostly true of institutions of a certain provenance and scale: when China Investment Corporation (CIC) says it’s 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’s 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 teams hardly have the experience and span to cover the globe. They also favour 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. Last week, ADIA led a $265 million fundraising round for India’s ReNew Power alongside Goldman Sachs and the Global Environment Fund, for instance.
And that’s only the tip of the iceberg: most sovereigns actually lack the resources to do the job themselves and it’s not so clear they’re 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 sovereigns can potentially benefit other LPs. It recently emerged that 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.