Undeterred by the oil slump, state-backed investors are seeking tie-ups to carve the best deals for themselves
Sovereign wealth funds may be young institutions, but that hasn’t prevented them from riding this decade’s volatile climate in a stately fashion. Undisturbed by several waves of quantitative easing, uncertainty in the eurozone and popular revolutions in their backyard, the largest 75 have seen their assets nearly double to $7.7tn since 2010. From Qatar to Australia, well-endowed funds have gradually ditched their traditional taste for discretion to snap up high-profile airports and football clubs.
The oil price drop and the end of the commodity boom are now presenting sovereigns with their most serious test yet. Many of them indeed derive their revenues from the stuff, so some will undoubtedly see their funding stagnate. Others could suffer withdrawals as governments run out of cash. But insiders reckon better risk and liquidity management systems, developed following the Financial Crisis, mean few will be caught short.
This suggests sovereigns will leave their investment strategies on their current course. And that’s good news for sellers of trophy assets: in their search for diversification and better risk-adjusted returns than those offered on public markets, state-backed funds continue to be very keen on private alternatives. Infrastructure is king among these, as sovereigns feel their long-term horizon, capacity to absorb large deal sizes and political connections give them an edge to secure transactions.
But there is a catch: in a world of low interest rates, demand for big-ticket, high-yielding assets far outstrips supply. That's making it harder for sovereigns to reach their target allocations – and inducing them to seek external help. While fund managers continue to be relevant in specific markets, collaboration between sovereigns themselves is therefore taking root: the participation of peers to an infrastructure deal often guarantees swifter board approval; sovereign consortia usually secure a better price thanks to greater credibility and scale. The Abu Dhabi Investment Authority and Singapore’s GIC, for instance, recently placed a joint $7bn bid for a Swedish grid.
The trend could become more pronounced as sovereign giants such as China Investment Corporation or Singapore’s Temasek seek to make forays in developing countries. Emerging market infrastructure remains a risky business, but for some institutions it has a unique appeal: projects generally enjoy the support of local authorities, mitigating political and regulatory risk, while the ability to team up with development banks and governments often protects investors from undue intervention. And in those markets, having an insider track on projects can be crucial to source deals.
The nature of collaboration between sovereigns is also changing – suggesting the trend is here to stay. Long driven by government relationships and proximity, it is now more often based on investment expertise: established investors from Asia and the Middle East are starting to help fledging organisations, such as African ones, in return for introductions and tips. State-backed funds may be facing headwinds, but their staying power is growing stronger as they build long-lasting bridges.