Private markets are being favoured by many Middle Eastern sovereign wealth fund (SWF) investors thanks to the long-term and illiquid nature of many of private market asset classes, investment management Invesco has said.
The firm, which published its annual Global Sovereign Asset Management Study on Monday, said that sovereign investors were taking advantage of the fact that they can commit capital for longer periods to improve returns.
“Since the financial crisis we have seen very low yields and there is a hunger for yield, sovereign investors are trying to harness the illiquidity premiums that come with private markets in terms of locking up capital for 7-10 years - or more in the case of infrastructure,” said Zainab Kufaishi, Invesco’s head of institutional sales for the Middle East and Africa.
“They are trying to access newer, different markets to get that enhanced return,” she told Zawya in an interview that took place at Invesco’s offices in Dubai.
For sovereign investors globally, average allocations to alternative investments - such as private equity, real estate, infrastructure, hedge funds and absolute return funds, as well as commodities - reached a new high of 20 percent in 2017, more than double the average allocation of about 10 percent just four years earlier in 2013.
Private equity and real estate continue to be the largest sub-sectors in terms of investments into alternatives, while infrastructure is the clearest beneficiary of expanded allocations, the report said.
Of the Middle East sovereigns interviewed by Invesco about their exposure to alternative assets, 44 percent cited an increase in asset allocations to private credit markets, 33 percent cited an increase in exposure to infrastructure investments, and 22 percent said that had increased investments in real estate. Interestingly, investments in private equity investments were flat, with 22 percent of interviewees citing an increase in exposure to this asset class, but the same number citing a decrease.
However, Kufaishi said that “the challenge that investors have faced is while they may have a target allocation of say 12 percent to infrastructure or 12 percent of private equity, they aren’t able to put that money to work,” Kufaishi said.
According to Kufaishi, SWFs have had difficulties allocating their target percentages in private equity as the companies in that sector that hold their money have been hesitant to deploy due to the fact that they see valuations as being too high.
“The private equity houses may believe the private equity deals are overpriced so they keep the capital and as a result the underlying investors aren’t getting the exposure to private equity that they want,” Kufaishi said. “It’s a catch 22 as global investors are wanting to do more private markets, the more money that piles into the asset class (and) there’s a certain amount of deals, especially in real estate, for example.”
A pick-up in infrastructure deal activity over the last year has seen an improvement in deployment time for that asset class, driven in large part by developing economies in Asia pushing ahead with large-scale infrastructure projects where they are turning to institutional investors for capital.
Infrastructure that needs big investment, such as toll roads, bridges and hospitals, is a growing theme both regionally and globally as the US undergoes an infrastructure boom, Kufaishi said.
“Infrastructure is an area they’ve been looking at for a long time and this year there’s allocation to it,” Kufaishi said.
Adil Adou, portfolio manager for The National Investor (TNI), said private equity investment remains of interest for regional funds because from a sector diversification perspective, investments mainly in listed companies do not provide investors with the proper diversification they desire.
“In the region, private equity gives more access to different businesses and sectors of the economy. Saudi Arabia is the most diversified market in the region, although other markets have really small niches and are not properly diversified,” Adou said.
After two relatively subdued years of returns, the past year has seen particularly strong outcomes as sovereign investors achieved a return of over 9 percent in 2017, according to Invesco. Development sovereigns – funds that are established with the primary aim of growing domestic economies – performed best at nearly 12 percent, thanks to their exposure to private markets assets.
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