Sovereign wealth funds look in a strong position to counter the impact of Covid-19, having substantially raised their portfolio exposure to healthcare and technology assets in recent years.

Yet state investment institutions face challenges, not least increased pressure to support their domestic economies as they emerge from the crisis, said Will Jackson-Moore, global leader for private equity, real assets and sovereign investment funds at consultancy PwC. 

He was speaking yesterday (June 9) at a webinar for the release of the International Forum of Sovereign Wealth Funds’ latest annual review.

The report showed that IFSWF’s 70-odd member funds more than doubled the share of their assets held in domestic investments to 22% as of end-2019 from 10% in 2015. (Interestingly, though, this doesn’t apply to the Asia-Pacific funds, which still invested some 95% of their assets overseas last year.)

Moreover, last year SWFs were particularly keen on sectors such as enterprise software/services and biotechnology, which have proved more resilient to the Covid-19 crisis (see graph below). 

CHANGE IN SWF DIRECT INVESTMENTS, 2017 TO 2019
(Source: IFSWF; Click for full view)

The trend for SWFs to do more domestic and more direct, private investments is expected to accelerate as governments seek to counter the devastating impact of the coronavirus outbreak.

“The historical focus of many of the larger [sovereign funds] has been the inter-generational preservation of wealth,” London-based Jackson-Moore said. “But more recently many newer funds have been much more focused around the development of [their local] economies. And I think we’ll see more of that and potentially more local investment to support businesses.”

SWFs’ rising investment in domestic assets is partly down to the launch of a growing number of new development funds – such those in Egypt (last year) and Turkey (in 2016), confirmed Enrico Soddhu, head of data and analytics at London-based IFSWF.

Will Jackson-Moore, PwC

But well-established state savings funds – such as Alaska Permanent Fund (APF) and New Zealand Superannuation Fund – are also investing at home more often, he said.

In October APF launched its first dedicated programme with $200 million to invest in private markets domestically with the help of two local asset managers, Barings and McKinley Capital.

NZ Super has investing domestically in timber and now has several local programmes. They include a venture capital programme to invest in New Zealand startups, a partnership with Russell Group to invest in tourist assets in the country and a project with Canadian pension plan CDPQ to build the Auckland light railway.

HINDERED BY NATIONALISM

The rise of nationalism across the globe since 2016 has also proved a hindrance to SWFs’ cross-border investments, putting them under greater scrutiny, noted the IFSWF report.

This trend manifested itself in the trade dispute between China and the US and in the UK’s vote to exit the European Union in 2016. Moreover, this year India amended regulations to restrict foreign portfolio investors’ participation in Indian equities, said the report.

Rising geopolitical tensions, slowing global economic growth, less liquid stock markets and increasing competition in private equity markets all contributed to an increasingly challenging investment environment, added the paper. As a result, the value of equity stakes taken by SWFs last year dropped to $35 billion from $43.3 billion in 2018, by IFSWF figures.

Hence it is perhaps not surprising that sovereign funds are eyeing opportunities closer to home.

“Right now businesses are very focused on the immediate crisis and on medium-term resilience,” Jackson-Moore said. “As we come out of this crisis and [companies] look to growth agendas and how they finance them, that will be a great opportunity for funds that go in to take 10% to 20% stakes … in strong businesses that are short of liquidity and cash.”

The means SWFs will be well placed to increase the number of investments they make, once the impact of Covid-19 subsides. “Governments around the world have been putting a huge amount of debt into businesses, and ultimately a lot of that will be need to be refinanced.”

But they also face the challenge of maintaining their existing portfolios, Jackson-Moore added, having built up bigger direct holdings in recent years. 

“As soon as a direct investment starts to struggle, it takes up a huge amount of bandwidth,” he said. “I do wonder whether we will see one or two funds revisiting their strategy if they have some tough investments or maybe get some negative PR or it sucks up a lot of bandwidth to deal with them.”