Risk Averse Pensions Open Doors for SWFs

As many institutional investors are turning away from risk, others with a higher tolerance could stand to benefit.

(January 24, 2013) -- A change in risk appetite by pension funds and insurers addressing their funding status or readying for new regulation is set to create new opportunities for sovereign wealth investors, JP Morgan Asset Management has predicted.

A note from the asset manager today said changing attitudes, which often translated into a risk reduction, meant sovereign wealth funds (SWFs) would have more prospects to expand into one of four asset classes: emerging markets, Europe, private markets and alternatives, and co-investments.

"Many sovereign investors can take advantage of the change in risk appetite of pension funds and insurance companies, who are facing significant challenges due either to their funding status or to new regulations such as Solvency II or the IORP Directive," said Patrick Thomson, global head of sovereigns at JP Morgan Asset Management.

"As these traditional sources of long-term capital continue to dwindle, sovereign investors, who typically have much longer horizons, can benefit from the opportunities that arise in non-traditional assets."

Thomson said there had been, and would continue to be, a growing number of direct deals and co-investments from these large sovereign investors. He said these would see SWFs partnering together or with asset managers to carry out the deals.

"Co-investments provide them with additional control over structuring ownership of the asset and more flexibility around the exit options," Thomson said.

Direct investments by SWFs in 2012 totalled $57.3 billion, according to JP Morgan's figures. This was four times higher than in 2006. Real estate made up a significant part of these direct deals. Their value grew by 36.4% last year, JP Morgan said, as investors diversified away from equities and fixed-income markets.

Despite being the first losers when crisis hits financial markets, JP Morgan said SWF had increasingly bought into the economic story of emerging markets. Thomson said: "The dynamics and fundamentals have convinced sovereign investors to increase their exposure to emerging markets to take advantage of this positive growth."

A paper issued late last year highlighted the different investment styles between SWFs and other institutional investors. "Comprehensively, we find that SWFs act distinctively from other traditional institutional investors when investing in private equity," the authors - Sofia Johan of York University, April Knill of Florida State University, and Nathan Mauck from the University of Missouri - claimed.

Furthermore, according to the paper, SWF investment in private equity may be primarily financially motivated as SWFs tend to underperform in the public markets.

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