First established in Kuwait in the 1950s, sovereign wealth funds have become an increasingly influential group of investors on the global allocator stage. With the largest funds accumulating around $1.3trillion in assets under management, investing for the long term in a wide variety of asset classes, including a growing pool of investment in private markets, these funds hold significant power. So, what are the trends we’re seeing emerging in the sector?
We’re certainly seeing a move towards greater transparency across the sector. The Linaburg Maduell Transparency Index was developed at the Sovereign Wealth Fund Institute in 2008 in response to the financial crisis and provides a global standard that allowed sovereign wealth funds to be benchmarked for transparency to the public. It forms a useful part of the story, but doesn’t provide the whole picture. We are certainly seeing demand for solutions that offer greater visibility into SWF portfolios via analytics and data visualisation tools. Custom reports that can be shared with stakeholders are increasingly popular.
Increased allocations to private assets
The financial crisis also played a fundamental part in the way some sovereign wealth funds allocated capital, with many moving from traditional government bonds towards the endowment style model, investing in unlisted assets including private equity, real estate and infrastructure.
Covid seems to have only accelerated this trend and many prominent SWFs have steadily increased their allocations to private equity, real estate and infrastructure over the past 12 months, whether via direct investment or co-investments. The IFSWF and PwC Report on Private Equity Partnerships highlights that sovereign wealth funds have become much more sophisticated investors, with a better understanding of where their strengths lie.
The private markets approach does need a different risk management strategy however, with robust governance procedures around investment decision making and monitoring of GPs and other third parties. As recent proposals from the SEC around private investment funds show, regulatory scrutiny is increasing and where the US goes, the rest of the world often follows. Even though many commentators believe the SEC is gold plating its proposals around private markets, it would be sensible for SWFs to ensure they have appropriate monitoring tools and controls in place.
Added to the traditional common goals of preserving the nation’s wealth for future generations, supporting domestic industry and managing revenue volatility, many sovereign wealth funds are also actively increasing their focus on ESG and sustainable investing. Finbold.com, using data from Global SWF reported that in 2021, investments into ESG funds and equities grew more than 3x from $7.2bn to $22.7bn. In the same year, investments into oil and gas related assets declined from $13bn to $6.9bn.
The One Planet Sovereign Wealth Fund Framework was established by six of the largest and most influential SWFs; ADIA, Kuwait Investment Authority, NZ Super Fund, Norges Bank Investment Management, Saudi Arabian Public Investment Fund and Qatar Investment Authority and has since been joined by more than ten other funds. The group rightly recognize their immense influence and potential for driving the transition to a more sustainable, low carbon economy.
In line with this, we’ve seen demand for tools to measure ESG and diversity metrics steadily increase in the last two years and believe that the move towards standardization will continue. The plethora of frameworks that are available can be confusing however and Dasseti’s clients harness the platform’s flexibility to identify, gather and analyze the range of data points that make most sense to their own stakeholders.
We’re seeing SWFs embracing digital, both within their own systems and processes, via our clients that are embarking on digital transformation projects, or through investments in crypto and digital assets. Temasek in Singapore holds investments in Binance Singapore and Mubadala’s CEO and Managing Director Khaldoon Al Mubarak stated his intention to look at investments in the crypto ecosystem. While other sovereign wealth funds may not be actively or openly pursuing investments in crypto or digital assets like non fungible tokens NFTs, many are already invested indirectly in cryptoassets with stocks in businesses like Tesla, MicroStrategy, Coinbase and Square. This approach helps SWFs manage risks by balancing their investments across a diversified portfolio.
When Russia invaded Ukraine in February, Norges Bank’s Government Pension Fund Global was the first SWF to announce that it would be divesting its $2.8bn Russian assets as soon as it could. With its ethical committee having power over investments, it was bound to follow the example set by many other global financial institutions. The announcement was followed by Australia’s Future Fund, which confirmed it would implement all sanctions imposed by Australia, the US and EU. However, whilst divestment is the goal, these funds are finding that they are stuck with the assets and a freeze on trading is currently the only viable option.
However, many sovereign wealth funds are taking a long, hard look at their portfolios, following what will undoubtedly be heavy losses for some following the loss in value of Russian assets. With concerns about other potential conflicts, tools that allow a speedy, compliant evaluation of exposure to certain markets could be invaluable.
As we’ve seen with the increase in allocations to private markets, we expect sovereign wealth funds to diversify their portfolios to include an even broader range of asset classes and investment vehicles. This could include a greater exposure to digital assets as we mentioned.
We may see greater levels of investment into domestic assets. While most sovereign wealth funds are predominantly global in outlook, with the growing political position and some clear alliances forming namely between Russia and China, SWFs may choose to realign their investments closer to home, or with neighbouring countries.
Get in touch if you'd like to discuss further