The extent to which sovereign investors are taking a lead in funding groundbreaking technologies has been highlighted in a new survey released this week.
A report published on Monday by ICEX-Invest in Spain, jointly with the IE Business School, shows that sovereign wealth funds (SWFs) have been actively expanding their strategic asset allocation via higher risk ventures, private equity/debt transactions, co-investments and joint venture partnerships.
While investing in mainstay institutional assets such as real estate and infrastructure has slowed after a record year in 2017, SWF allocations to cutting edge technologies, as well as health and life sciences, are accelerating.
“This trend confirms the key role played by public instruments in sustaining or driving innovation and change,” ICEX chief executive María Peña said in the report's introduction.
Chart: Top 5 SWF Investment Sectors 2018
In particular, SWFs are increasingly cooperating between themselves, with Singapore’s GIC, China Investment Corporation (CIC) and Qatar Investment Authority (QIA) three of the most active co-investors.
However, it's not a universal trend and only the most mature and well-resourced funds, it seems, are pushing out the envelope in their investment approach.
GIC, CIC, QIA, Temasek, Abu Dhabi Investment Authority and Kuwait Investment Authority are among the funds to have established industry-specific teams and hired investment talent in order to participate in direct investment deals. Those six SWFs represent 72% of all co-investment activity.
Furthermore, out of the report's universe of 91 active sovereigns, only 22 have engaged in some kind of co-investment activity.
In terms of aggregate capital contributed by all investors, the 199 co-investment deals identified by the ICEX research between 2008 and 2017 represented approximately $96 billion of investment. This was distributed geographically across three primary destinations – the UK ($21 billion), US ($16 billion) and China ($11 billion), which accounted for more than 50% of the total invested by deal value.
Chart: Top 5 SWF Investment Destinations
China’s biggest institutions are among the most active partnering investors. In 2017, CIC announced plans to establish a $5 billion co-investment fund with Goldman Sachs to invest in US companies. In 2018, another $1 billion co-investment fund with HSBC was announced to focus on UK-based companies with ties in China.
The ICEX report said CIC is in advanced discussions to establish several new co-investment funds focused on the US, UK, Europe and Japan, to enhance its strategic positioning.
China Life Insurance is another example of active co-investment with Asian partners. The state-owned insurer, with assets under management of $117 billion, has co-invested with Temasek, Khazanah and GIC.
In recent years, Hong Kong-based AIA Group has partnered with several SWFs to co-invest, including GIC, CIC, QIA, Temasek, and China’s National Social Security Fund.
"This shows how even weak partnership deals (with shareholders for example), may lead to strategic collaborations and repeated engagement deals," the report said.
Chart: SWFs Investment Strategies by Type
Since SWFs are invested in some of the companies they form partnerships with, it follows that some of the well-known global private equity houses are also partially-owned by SWFs. One of the best-known examples was CIC and Blackstone. CIC invested in the US investment firm before its IPO in May 2007. Their initial 9.9% stake was increased to 12.5% in 2008.
The equity relationship lasted until March 2018, when Blackstone announced the departure of CIC as a shareholder. Despite that, Blackstone remains one of the most important external asset managers for CIC, collaborating with the China sovereign on real estate and hedge fund allocations.