SWFs shifting from property investments to private equity

Sovereign wealth funds’ allocations to private equity and private debt have risen, but those to real estate have fallen, according to Preqin data.
SWFs shifting from property investments to private equity

The desire of sovereign wealth funds (SWF) to find higher-yielding alternative assets is leading them to increasingly de-emphasise real estate investments and prioritise private equity and private debt, as the former sector struggles with the impact of the Covid-19 pandemic.

Data from alternative asset data provider Preqin, which tracked 58 SWFs active in real estate, private equity and private debt, showed that their median allocation to the asset class was 9.51% as of August 2020, up from 7.7% in August 2019. The median allocation to private debt was 4.02%, rising from 3.32% a year ago. 

In contrast, the SWFs saw their investment in real estate fall to 6.65% in August, down from 7.18% a year ago. A quarter of SWFs active in property investing said they have no plans to invest in the asset class this year, compared to a fifth in 2019. The assets under management for the 58 SWFs totalled $35.3 trillion.

Elliot Hentov, SSGA

Elliot Hentov, head of policy research at State Street Global Advisors, said SWFs have hit the pause button on real estate investing. Some are nursing their losses, and they have to decide whether the pandemic is here to stay or not.

“It is a real strategic decision on what’s the view of the future economy? How will housing be needed? What type of real estate will be in demand?” London-based Hentov said, adding that “full normalisation [for the real estate industry] might not return”.

Separate data provided by advisory firm Global SWF showed that SWFs’ capital deployment into the real estate sector in the first eight months of this year dropped 69% from the same period last year to $5.1 billion. The number of real estate deals by SWFs in the past eight months of this year has fallen to 14, versus 29 that took place between January and August 2019.


Tom Clapham, head of Asia for global client solutions at Aviva Investors, agreed that SWFs may indeed have slowed down on property investing over the short term.

“During periods where stocks fall sharply as we experienced in March of this year, due to the valuation lag in real assets, there is a denominator effect that may have caused some to temporary halt new deployments,” he said.

Another reason for the property pullback is that some SWFs may have needed to bolster their short term cash to fund government withdrawals designed to stabilise domestic economies.

Travel restrictions have also played their toll. “On a practical level, it’s also the case that travel bans have made it impossible for a SWF in Asia for example to conduct onsite due diligence on a deal in Europe,” said Singapore-based Clapham.

Before the onset of Covid-19, the search for yield in a low-interest-rate environment drove SWFs to invest in real estate, said Hentov. Their focus had shifted from prime assets in tier-one cities to commercial properties in urban centres in tier-two cities.

Over time, some diversified into niche property segments such as large scale university housing, Hentov observed.  A notable student-housing deal involving sovereign wealth funds was the 2018 acquisition of 24 assets in 20 diversified university campus markets across the US for $1.1 billion by Canada Pension Plan Investment Board, GIC and The Scion Group.

However, the pandemic has wreaked havoc on most property types as students moved to online learning while a majority of white-collar employees transitioned to working remotely, away from the office. Hotel and retail assets have largely been empty due to lockdowns and movement restrictions. Australia’s Future Fund, which posted a negative return of 0.9% in the 12 months to June, told AsianInvestor earlier this month that it had sold property and infrastructure assets to shield it from an even worse result.

“Basically, everything that they thought they knew in the last 10 years may no longer be true,” said Hantov. 

However, Clapham said he does not expect the pandemic to stifle SWFs’ appetite for real estate investments in the long term. In fact, within real estate, Aviva has seen increased activity in logistics and renewable energy and less enthusiasm for retail and office assets. 

“Given their longer term structural shift toward illiquids, there is considerable speculative interest among all institutional investors to take advantage of any re-pricing in high quality real assets,” he said.


While SWFs’ overall real estate investment slowed during the pandemic, their enthusiasm for private equity is rising.

Janet Li, Mercer

“Lately, we have seen more interest in private credit. It is like the fixed income of alternatives,” she said. Her observations were in line with data provided by Preqin.Among alternatives, the most popular asset class is private equity, said Janet Li, a wealth business leader for Mercer in Asia. Li also noted an increased participation by SWFs in private debt.

Another segment in private equity that has shown rising investment is venture capital. As sovereign wealth and pension funds continue their push into early-stage investments, notably in healthcare and technology, Covid-19 has created opportunities by pushing down valuations.

According to Preqin data, SWFs participated in 99 venture capital deals between January and August this year with an aggregate value of $11.3 billion. This is higher than 93 deals with a value of $7.1 billion during the same period last year. In both periods, information technology accounted for 41% of the number of deals. The higher deal-making volume came despite travel restrictions, which have hindered efforts to process and diligence deals.

Overall, Li added that the current period presents opportunities for SWFs to acquire assets on the cheap. “It is actually good timing for them to reposition their investments and to invest in a lower valuation environment.”

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