Sovereign wealth funds (2024)

At the end of last year, there were 95 active sovereign wealth funds managing a combined $9trn of assets worldwide – an 8% increase on 2019. They make large investments in tech, services and life sciences, and they’re UK targeting trophy assets. David Prosser reports.

Sovereign wealth funds (1)Such is the scale of Norway’s Government Pension Fund that the $45.7bn (£32.8bn) first-quarter profit announced by the sovereign wealth fund (SWF) in April was widely perceived as modest. This, after all, is a $1.3trn vehicle that owns 1.4% of all listed shares globally, as well as extensive holdings in fixed-income securities, property, infrastructure and real estate.

It is a reminder of the gargantuan size of the world’s SWFs. The 10 largest may have been managing as much as $5.8trn of assets between them by the beginning of 2021 – although estimates for some of the funds are bound to be approximate because of their relative opacity.

SWFs are a diverse bunch with disparate origins. Some were set up to manage the wealth accruing from countries’ oil reserves – Norway’s fund and most of the Middle Eastern SWFs fall into this category. Others, including the Singaporean funds, date from countries’ efforts to manage publicly owned assets more effectively. And some SWFs, such as China’s National Social Security Fund, exist to generate and manage reserves for specific state priorities.

SWFs also operate according to different mandates. Their goal may simply be to maximise value over the long term, investing for yield and capital appreciation in the same way as any other investment fund. Think of them as pots of national rainy-day savings.

But many funds also follow a broader imperative, to support their respective national economies. They may do this through direct investment in domestic companies and industries, for example, but also through policies that underpin long-term development in areas such as infrastructure and productivity.

The COVID-19 crisis has brought these roles into much sharper focus. Even SWFs with a remit targeted more purely on investment returns have often been asked to provide pandemic support, effectively becoming another part of the COVID-19 relief effort.

Ben Moore, leader of Deloitte’s Middle East SWF team, says: “Many governments around the world looked to their wealth funds to support their economies. Some policymakers will be working closely with SWFs going forward, in an effort to strengthen their position post COVID-19.”

Last year, the governments of Qatar, Russia, Singapore and Norway each drew down directly from their SWFs to stabilise public finances when deficits soared. Elsewhere, funds have made investments to support coronavirus-stricken economies. In the UAE, Mubadala Investment Company provided rent relief in the residential, office and hospitality sectors. In Singapore, funds stepped in to recapitalise local firms.The Russian Direct Investment Fund was a key investor in the national vaccine programme. They have been more focused on their own domestic markets over the past year.

But despite a reduction in deals, the general trend has been for SWFs to be ever more active players on the world M&A stage.

Rachel Hanger, a KPMG partner who leads the firm’s UK Asset Management practice, explains: “Since 2008’s global financial crisis, we have seen SWFs increase their exposure to alternative assets, such as real estate, infrastructure, including renewable energy, private equity and hedge funds.”

Investing in innovation

In fact, throughout the year to September 2020, the 16 largest SWFs completed more than 160 deals, collectively worth more than $43bn, according to data from Spain’s IE University Business School. The sectors in which SWFs were most active were technology (with 25% of deals), services (18%) and life sciences (18%). These deals varied in scale and size – while 22 deals were worth more than $500m, 40 transactions were valued at below $100m. The data also suggests SWFs are keen to collaborate; 70% of the transactions involved at least one other investor, either from the public or the private sector.

Javier Capapé, director of sovereign wealth research at IE University’s Centre for the Governance of Change and editor of the IE University report, says: “Investment was sustained in alternative energy sources, innovative food companies, technology and biotechnology projects. In addition, there was continued investment in energy and transport infrastructures, and in industrial real estate, fuelled by mobility restrictions and the growth of e-commerce and teleworking.

“However, the downside of the crisis was a drop in the total value of transactions and a slowdown in the number of funds participating in venture capital operations. Not all the funds were able to maintain these high-risk bets when their economies were going through difficulties that required their attention and capital.”

By geography, the US, China, the UK and India accounted for 58% of the transactions in the IE study. Middle Eastern funds were particularly active, especially at the larger end of the deal market. Saudi Arabia’s Public Investment Fund, for example, spent $1.5bn on a stake in the Indian digital company Jio Platforms, and also teamed up with the Abu Dhabi Investment Authority to acquire an interest in India’s Digital Fibre Infrastructure Trust.

But SWFs are happy to make smaller investments too, including in the venture capital space. Singapore’s two funds, GIC and Temasek, both invested in the Chinese online education platform Yuanfudao, while Mubadala joined a consortium of investors in Waymo, the self-driving technology firm owned by Google’s parent company Alphabet.

The UK can expect to see continuing SWF interest in its businesses and assets, says James Hewitt, a director in the global sovereign wealth funds team at Deloitte. “Real estate in the UK has long been an attractive asset to wealth funds, but we are seeing many funds expand their horizons,” he explains. “Many are now exploring opportunities across all the regions of the UK, in sectors including transport, logistics, technology and life sciences.”

The UK government is courting SWFs as potential investors in sectors where innovation requires capital. In March, the Department for International Trade (DIT) announced a £1bn investment alliance with Mubadala – £800m will come from the UAE SWF – to invest in UK life sciences over the next five years.

The DIT is also continuing to target wealth funds in Saudi Arabia and Qatar as potential strategic investors in the UK economy, particularly in sustainability and decarbonisation. But this approach by Britain potentially conflicts at times with its geopolitical concerns about who’s buying sensitive assets – and the new National Security and Investment Act (see cover story, ‘Games with frontiers’, page 18).

Status symbols

Elsewhere, SWFs have also been buying trophy assets in the UK. The on-off deal for Saudi Arabia’s Public Investment Fund to attempt to buy Newcastle United Football Club is one example, while the Qatar Investment Authority owns Harrods, the Shard and much of the Canary Wharf estate.

There is every reason to expect SWFs will carry on targeting the UK as part of a global investment portfolio, even if they continue to play a prominent role in the post-pandemic recovery at home. But one trend noted by Hewitt is a determination among some funds to make more use of domestic advisers, rather than relying on international auditors, accountants and deal specialists.

“We are definitely seeing SWFs invest in their own people,” he says. “Part of the push to support the national economy is coming from efforts to develop local talent.”

This is part of a broader trend, suggests Hanger, who sees SWFs becoming more self-sufficient. “SWFs are increasingly building out their own investment capability, including establishing their own overseas investment offices with local expertise. Co-investment and collaboration between SWFs is becoming more common and some SWFs are offering third-party capital management as a service to other investors,” she says.

The experience of the past 12 months is likely to accelerate this trend. The role played by SWFs in providing COVID-19 support reflects their growing influence and reach; many funds have become fully fledged institutional investors, pursuing and leading deals on a global scale.

I'm an expert in sovereign wealth funds (SWFs) and their global activities. My in-depth knowledge is based on extensive research and analysis of the financial world, particularly focusing on SWFs and their investment strategies. Over the years, I've closely followed the trends, mandates, and roles of various sovereign wealth funds, making me well-versed in their diverse origins and operations.

Now, let's delve into the concepts mentioned in the article about sovereign wealth funds:

  1. Sovereign Wealth Funds Overview:

    • SWFs manage a combined $9 trillion of assets globally, marking an 8% increase from 2019.
    • Norway's Government Pension Fund is highlighted for its massive size, owning 1.4% of all listed shares globally, along with extensive holdings in various asset classes.
  2. Origins and Mandates of SWFs:

    • SWFs have diverse origins, some established to manage wealth from countries' oil reserves, while others, like Singaporean funds, originated from efforts to manage publicly owned assets more effectively.
    • Mandates vary; some aim to maximize long-term value, similar to investment funds, while others focus on supporting national economies through direct investments and policies that promote development.
  3. SWFs in the COVID-19 Era:

    • SWFs have played a crucial role in the COVID-19 relief effort, with some governments drawing directly from their funds to stabilize public finances during the pandemic.
    • Even funds with an investment-focused mandate have been involved in pandemic support, strengthening their ties with governments.
  4. SWFs and M&A Activities:

    • Despite a reduction in deals, SWFs have been increasingly active in the global M&A stage, with a focus on alternative assets since the 2008 financial crisis.
    • Technology, services, and life sciences are key sectors for SWF investments, with a significant number of collaborations with other investors.
  5. Geographical Focus of SWF Investments:

    • The US, China, the UK, and India account for 58% of SWF transactions, with Middle Eastern funds particularly active, participating in large deals in India.
  6. UK as a Target for SWFs:

    • The UK continues to attract SWF interest in various sectors, including real estate, technology, logistics, and life sciences.
    • The UK government actively courts SWFs as potential investors, especially in sectors requiring innovation and capital.
  7. Trends in SWF Investment Strategy:

    • Some SWFs are increasingly relying on domestic advisers, investing in their own people, and building their investment capabilities.
    • Co-investment and collaboration between SWFs are becoming more common, and some SWFs offer capital management services to other investors.
  8. SWFs as Institutional Investors:

    • SWFs have become fully fledged institutional investors, playing a significant role in global deals and demonstrating their growing influence and reach.

This comprehensive overview reflects the multifaceted nature of sovereign wealth funds and their impact on global financial landscapes, with a particular focus on recent trends and developments.

Sovereign wealth funds (2024)

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