China to fore as global sovereign assets top $5 trillion

Private equity is benefiting from the rise of sovereign funds, leading many to expand their investment platforms.
China to fore as global sovereign assets top $5 trillion

Sovereign wealth fund assets have topped $5 trillion globally for the first time, with Chinese entities accounting for one fifth at $1.14 trillion, according to the Sovereign Wealth Fund Institute.

In its latest rankings, the Abu Dhabi Investment Authority leads the pack of 61 sovereign funds with $627 billion in assets, followed by Norway's Government Pension Fund – Global at $611 billion.

Safe Investment Company ranks third with $567.9 billion, followed by Saudi Arabia's Sama Foreign Holdings on $532.8 billion and China Investment Corporation in fifth place on $439.6 billion. Overall oil and gas related funds account for 57% of the total.

Hong Kong Monetary Authority Investment Portfolio features prominently in seventh place with $293.3 billion, followed by Government of Singapore Investment Corporation (GIC) at $247.5 billion and Temasek Holdings ($157.2 billion) in eighth and ninth spots, respectively. China's National Social Security Fund holds 11th spot  with $134.5 billion.

The $5 trillion figure, reached at the end of last month, represents a steady rise from the $4.5 trillion in March 2011 and $4 trillion in March 2010.

Growth among each sovereign fund varied, with GIC maintaining about the same amount of assets as it did in April 2009, while Hong Kong’s exchange fund has nearly doubled from $139.7 billion, and Safe has expanded 63% over the same period, from $347.1 billion.

One asset class above all has benefitted from rising sovereign assets. SWFs are understood to be the biggest source of capital for private equity, with an estimated 57% investing in PE, according to data provider Preqin. Of sovereigns with PE exposure, 73% are based in Asia or the Middle East.

The Kuwait Investment Authority is allocating $30 billion – equal to nearly 10% of its total assets – to private equity, Preqin says, making the Kuwaitis possibly the world’s largest PE limited partner.

“Private equity is an increasingly important investment alternative for Asian and Middle Eastern SWFs as they continue to look for higher returns over the long term in what is now a low interest rate environment,” says Jai Arya, global head of BNY Mellon’s sovereign institutions group.

SWFs are doing direct private equity investing where possible and opening overseas offices in the markets where they are investing, adds Arya.

The purchasing power of sovereigns, and their influence in the development of the private equity sector, was addressed by a panel of top PE executives at the recent Milken Institute 2012 Global Conference in Los Angeles.

SWFs, along with pension funds – another big allocator to the sector – have led PE firms to develop broader platforms to serve their investment interests, which range from debt, real estate and natural resources, according to the panel.

“As a result of these interests on the part of limited partners, all of the major firms … who have thought of themselves historically as private equity firms are actually moving to broader platforms,” says panellist David Bonderman, founding partner of TPG Capital. “They’re having investment products which, while related, are not what we would call traditional private equity products."

He adds: “You see firms starting to think of themselves as alternative asset managers, for example, as opposed to private equity. The whole business is broadening out as [firms] try to build platforms.”

SWFs are increasingly looking to alternatives as a method of long-term revenue generation, Cerulli Associates consultant Chris Wright noted at the recent Fund Forum Asia 2012 conference.

Says BNY Mellon’s Arya: “Sovereign wealth funds are not looking to exit early, and are an increasingly important source of capital for many.”

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