SWFs Building up to Go It Alone

Asset managers may want to partner with SWFs, but it looks like they are happy to invest by themselves.

(May 13, 2013) -- Some of the world's largest sovereign wealth funds (SWFs) are adding staff and bolstering internal infrastructure to boost their direct investing power, a report this month has claimed.

Middle Eastern SWFs have been bringing in internal investment and operational staff "to increase their capacity to evaluate direct investment and co-investment opportunities," a report by consultants and auditors KPMG said. The authors added that the economic environment over the past couple of years had helped these gargantuan investors:  "Ironically the fact that these people are available is for some part down to the global financial crisis."

The Abu Dhabi Investment Authority (ADIA), for example, last year hired leaders for its private and direct equities divisions.

So far, the general push has been limited to direct investment in private equity, infrastructure and real estate - asset classes that lend themselves the most easily to commitments of this type.

"In parallel with this we have noted some funds appearing to alter their asset allocation to provide these new resources with capital" the report, entitled "Emerging Trends in the Regional SWF Landscape" claimed.

Assets held by these mammoth funds across the entire sector reached an estimated global $5.3 trillion, the KPMG report said, citing figures from the SWF Institute.  Of this, some 30% is held by ADIA, which is estimated to hold around $627 billion in assets.

Rather than being a follow-on from direct investments made by some Middle Eastern SWFs into failing banks during the financial crisis, which KPMG classes as "politically driven " and "opportunistic in nature", the new breed of capital allocation is more tactical.

"We believe we are seeing an accelerating trend toward direct investment or strategies that offer the investor a greater level of control or influence over investment strategy," the report said.

Partnering with private equity houses to run managed accounts, which allow them a greater element of control over investments, has also been increasing in popularity, KPMG said, but another area caught the authors' eyes.

"One area we might also anticipate some development may be increasing direct investment in corporate debt instruments," the report said. "Given the current low yield environment in gilts [and] a tainted CDO market, one could see circumstances where participation in debt structures financing buyouts would be attractive. SWF investment is being sought in a new range of debt funds targeting financing of private equity buyouts and it is probably not too much of leap to bring the management of this type of investment in house especially if participating in the deal equity."

To read the full report, click here.

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