Amid rapid growth for state-owned investors, sovereign wealth funds and pension funds in 2021, private assets - including venture capital and real estate - are set to receive strong inflows in 2022, the latest Global SWF report revealed.
According to a report media briefing on January 6, themes such as ESG and tech are also set to attract more institutional investor interest in the new year.
The size of the sovereign wealth fund (SWF) industry, meanwhile, increased 6% year-on-year in 2021 and exceeded the $10 trillion mark for the first time in history, supported by the price of equities and the recovery of oil prices.
Public pension funds (PPF) also accomplished a historical milestone after growing past the $20 trillion mark, experiencing a higher year-on-year growth of 8.7% due to increased exposure to US stocks, and to rising contributions from pensioners around the world.
WINNERS: REAL ESTATE AND PE
In terms of performance, there was a big disparity between the performance of the different asset classes during 2021, with real estate providing the most exciting returns.
According to the report, fixed income was the only asset class with negative returns, as measured by the S&P 500 Global Bond Index. Public equities continued to display a strong performance, according to the S&P Global 1,200 Index.
Hedge funds disappointed again with returns significantly below stocks.
“Private markets are always more difficult to track as SOIs do not necessarily carry out valuations every quarter, and if they do, they have a certain lag. Yet, according to indices of listed companies, real estate was best performing asset class of 2021, followed closely by private equity,” Global SWF managing director Diego Lopez said.
Daniel Brett, head of research and data from Global SWF, believes longer term investors will continue to put effort into searching for tech and venture capital opportunities in China and India despite negative China regulatory headlines last year.
At the same time, asset owners are looking at increasing their allocation to private markets even further this year.
For example, Canada’s CDPQ increased its allocation from 27% in 2016 to 36% in 2021 and is targeting 45% by 2024; Abu Dhabi’s ADIA recently raised its allocation target bands for private equity and infrastructure, and Korea’s KIC is aiming to boost alternatives from 15% in 2021 to 27% by 2027.
GIC, CPP INVEST THE MOST
According to the report, the pandemic did little to slow the pace of SOI investment. Compared with 2020, SWFs deployed 19% more, with $106 billion in 500 transactions; while investments by PPFs increased significantly in terms of both value and volume, up to $ 112.9 billion in 354 deals.
GIC was once again miles ahead of its rivals. The Singaporean SWF deployed $34.5 billion in 110 deals, almost double that of 2020. Almost half of that capital was invested in real estate, with a clear bias to logistics.
The next biggest spender was Canadian CPP with $23.7 billion, of which 61% was invested in real assets.
AUSSIE REAL ESTATE TOPS
Real estate assets became one of the hottest picks among derivatives.
Australia emerged as a hot destination for state-owned investors in 2021, reaching new heights with $23.8 billion poured into real estate, infrastructure assets and private equity, according to the report. Deal activity continued unabated in the real estate sector, covering offices, retail, logistics, residential and industrial sectors.
Lopez believes “this trend will persist as the government drives forward its infrastructure program, capitalizing on the country's geographical and resource strengths to play a leading role in regional economic integration”.
In terms of cities, Sydney and Melbourne are seeing high levels of demand for offices, which has pushed up rents, while land constraints in prime locales – such as central business districts – have pushed up asset prices.
Industrial and logistics are focused on coastal areas with supportive networks, particularly in cities such as Perth.
Real assets have long been a focus for SOIs investing in Australia and 2021 was no exception. In terms of value, infrastructure represented 47% of the total for the year, real estate 39%, with the remainder made up of private equity. Foreign state-owned investors took the lead, contributing to 69% of the total.
RESPONSE TO COVID-19
After two years of adjusting to the pandemic, investors have been looking more closely at allocating to domestic markets, the report said.
“If we analyze the remaining SWFs, i.e., those with a flexible mandate that can invest both at home and overseas,” Lopez said, adding that the focus in strategies and portfolios was leaning towards domestic engagement.
In the two years leading up to Covid-19, SWFs invested 22% of their capital at home, but during Covid-19 that percentage increased to 41%, according to a Wall Street Journal report in July.