Middle East SWFs hunt returns through private asset classes, Invesco says

Some sovereigns are reducing private equity allocations in favour of other investments

Middle East sovereign investors cool on Europe in favour of China, says Invesco. Pawan Singh / The National 

Middle Eastern sovereign wealth funds (SWFs) are increasingly favouring investments in private markets including credit, infrastructure and real estate, although allocations to buyout firms are coming less popular, according to a report by asset management firm Invesco.

“Private markets are favoured by many sovereign investors [in the region] thanks to the long term and illiquid nature of many asset classes within this market,” Zainab Kufaishi, Invesco’s head of institutional sales Middle East and Africa, said in a statement.

“Good opportunities are seen in infrastructure and in private credit (debt that is not publicly traded), but respondents are seeing fewer attractive opportunities in private equity because of increased competition for assets and bidding up of prices.”

Middle East sovereign investors increased allocations to all four private market asset classes -- credit, infrastructure, real estate and the private equity -- examined in the sixth annual Invesco Global Sovereign Asset Management Study, published on Monday.

The proportion of regional investors surveyed who said they increased their allocations to private equity over the last three years stood at 22 per cent in 2018, while the same percentage of asset managers reduced their allocations to the sector, the report said.

A total of 22 per cent of those polled, enhanced their allocation to real estate segment, while 33 per cent boosted allocation to infrastructure. Private credit saw the biggest rise, with 44 per cent of investors increasing investments in the asset class.

Globally, investments into private markets have doubled over the past five years to account for 20 per cent of total allocations by the sovereign wealth funds, with infrastructure and private credit the most favoured asset classes in 2018.

"Over the last five years we've seen a general increase in private markets as sovereigns seek higher yields," Ms Kufaishi told The National by telephone. "Globally, private credit has attracted sovereigns as they identify opportunities created as banks pull out [of this segment] post the financial crisis and tightened regulations.

In the region, real estate has traditionally been an attractive asset class for sovereign investors and the trend is likely to continue. Although infrastructure is gaining prominence, there are challenges around execution of such transactions, she noted.

Over three-fifths (61 per cent) of global respondents to Invesco’s study were of the view that private equity is becoming overvalued. “We saw concerns about valuations of private equity [deals],” Ms Kufaishi said. Globally, however, investing in private markets has been a challenge for sovereign investors and many remain underweight.

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The study examines the investment behaviour of sovereign wealth funds and central banks, based on interviews with 126 individual sovereign investors and central bank reserve managers across the world, with combined asset value of $17 trillion. The total value of assets under management by Middle East sovereign investors reached $1.8t trillion, according to the survey.

The report this year showed that, globally, equities have overtaken bonds to become the lead asset class for sovereigns across active, passive and other strategies, with average equities allocation rising to 33 per cent in 2018 from 29 per cent in 2017. Sovereign investors see returns of 9.4 per cent on their investments in 2017, thanks largely to equity bull markets, up from 4.1 per cent in 2016, according to the report.

Middle East sovereigns are the most committed users of active management strategies, with an average of 65 per cent of portfolios being actively handled by the managers. Middle East sovereign investors also often pursue “opportunistic strategies in less traditional, less efficient markets where active management can potentially deliver significant [returns]”, the report noted.

Invesco also reported an increase in the popularity of some of the alternative investment classes, as sovereigns seek to realise a broader set of benefits from their portfolios. Although equities remain on the top, the average allocation to alternatives globally has doubled in the past five years, reaching an all-time high of 20 per cent in 2017, according to the report.