Apr 16 2012
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SWF's $5T target
Sovereign wealth funds' assets grew by USD500-billion in 2011 to reach USD4.6 trillion, according to the latest Preqin Sovereign Wealth Fund report.
"Despite widespread economic uncertainty regarding the sovereign debt crisis, volatility in many world financial markets and underperformance of certain asset classes, sovereign wealth fund aggregate assets have jumped by over half a trillion dollars across 2011-2012," wrote Preqin's Louise Weller and Alex Jones in a report.
More than half of SWFs have also shown a strong penchant for investments in private equity.
"However, the overall proportion of such institutions investing in private equity has fallen in the last year, as several newly established sovereign wealth funds have yet to make their maiden allocations to the asset class," said Preqin in the report.
HITTING USD5 TRILLION
Since the advent of the global financial crisis, SWF have been far more discerning and cut back on trophy assets that characterised the pre-global crisis era of excessive leveraging.
The Preqin growth figures are slightly more bullish than the SWF's Institute's USD424-billion growth in 2011.
The Institute said much of the growth likely came from commodity-based funds.
"The mechanized funding amounts of commodity-based wealth funds are vulnerable to the volatility in oil, mineral, and natural gas prices....," said SWF report in a February report.
The institute expects SWF assets could pass USD-5 trillion in assets, on the back of positive equity investment returns and increased commodity prices.
According to the institute's data, SWF total assets stood at USD4.95 billion by the end of March 2012, at least USD140-billion higher than the USD4.83 billion at the end of December 2011.
"If investment returns sour in 2012, commodity-based SWFs will make up a bigger portion of the total sovereign wealth fund asset pool. In addition to commodity price increases and positive asset returns, more and more countries are creating commodity-based sovereign funds."
After stumbling during the global financial crisis when the combined SWF assets fell from USD4.1 trillion by the end of 2008 to USD3.75 trillion by March 2009, the funds have made a smart recovery and are poised to cross USD5 trillion this year if the global economy holds up.
Source: SWF Institute
Abu Dhabi Investment Authority (ADIA) remains the world's largest sovereign wealth fund, with USD627 billion, with Norway's Government Pension Fund - Global, not far behind with USD611-billion in assets, according to SWF Institute.
China's SAFE Investment Company, with USD568 billion and Saudi's SAMA Foreign Holdings with USD532.8-billion make up the top four SWF funds in the world.
The Kuwaiti Investment Authority has USD296-billion in assets, while another Chinese SWF, the Hong Kong Monetary Authority Investment Portfolio, has amassed USD293.3 billion in assets.
The Qatar Investment Authority (USD85-billion), Investment Corporation of Dubai (USD70-billion), Libyan Investment Authority (USD65-billion). Abu Dhabi's International Petroleum Investment Co. (USD58-billion) and Algeria's Revenue Regulation Fund (USD56.7) billion are among the world's SWF with more than USD50-billion in assets.
PRIVATE EQUITY PREFERENCE
Preqin notes that some of the biggest sovereign wealth funds, such as Abu Dhabi Investment Authority (ADIA) and Kuwait Investment Authority are 'prolific' investors in private equity.
"In general, larger sovereign wealth funds are more likely to invest in private equity funds.... Of sovereign wealth funds with total assets of USD250-billion or more, a significant 83% invest in private equity funds, whereas this figure drops to 55% for SWFs with between $10bn and $49bn," wrote Preqin analysts.
"Smaller institutions, with total assets of less than USD1bn, are far less likely to invest in the asset class; 25% of the sovereign wealth funds with total assets under management that fall into this category invest in private equity funds."
Within the private equity space, sovereign funds are also more likely to invest in buyout (79%), or venture capital offerings (59%), with the least preference for fund of funds (28%) and mezzanine funding opportunities (28%).
North America remains a popular choice for PE opportunities, especially for MENA funds looking to invest outside the region. With its entrepreneurial reputation and access to one of the biggest consumer-friendly markets, North American startups and small businesses are always on the radar screen of MENA and Asian SWF.
The private equity route holds tremendous promise for SWF due to their potential of outsized returns. This is especially true at a time of extreme market volatility and lower returns from sovereign bonds.
"Although the financial markets remain turbulent, such institutions represent a significant amount of the capital invested in private equity and are likely to continue to allocate increasing amounts of capital to the asset class going forward," notes Preqin.
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