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Sovereign Wealth Funds

Sovereign funds back off real estate, infrastructure in 2017 – survey

Fewer private market deals, a greater focus on partnerships and increased interest in India's capital markets were the top trends among sovereign wealth funds in 2017.

The International Forum of Sovereign Wealth Funds, a global network of these institutional investors, studied investments and themes among 61 SWFs for its annual review published Monday.

A report of its findings said the well-documented trend for SWFs to use their scale, long-term investment horizon and little need for liquidity to increasingly invest in private markets — real estate and infrastructure in particular — was in reversal in 2017.

"This observation could be a one-year aberration, or a signal that investments in unlisted markets have plateaued after years of steady growth — as valuations are high, competition intense and SWFs have reached their target allocations — a trend that was foreshadowed in a 2016 survey of IFSWF members that suggested this trend was peaking," said the report.

Of 303 total direct and indirect investments in unlisted assets, funds made 184 direct investments in 2017; down from 196 out of 290 total investments in 2016.

The IFSWF found that real estate deals in 2017 looked to be the main driver for the slowdown across private markets, with the number of direct real estate investments made in 2017 falling to $15.6 billion from $17.6 billion a year earlier. SWFs completed 42 real estate deals in 2017, down from 77 in 2016.

"SWFs are finding it more difficult to buy properties; more institutional investors have recently entered the sector, increasing competition for high-quality assets and pushing asset valuations higher," said the report.

The forum also highlighted that the slowdown might have been exacerbated by the fact that newer SWFs are strategic funds, which have a mandate to develop their home economies rather than to save national wealth. The IFSWF said these funds are not active in international real estate markets.

Infrastructure also became more challenging for funds in 2017, with the number of investments made by SWFs falling 15% to 28 in 2017.

Two drivers were identified by the IFSWF: greater resistance from regulators that prevents funds from investing in major infrastructure assets; and that government-owned SWFs are facing increased competition and higher valuations for mature assets in developed markets, because an increasing number of investors are looking for bond replacement-type assets.

Regarding partnerships, in 2017 SWFs completed 203 investments in a consortium or partnership — more than double the number of solo deals and up from 142 in 2016.

Also in 2017, SWFs invested less in companies that serve the growing emerging market middle class than previously. "It appears that this change was partly because

some of them felt too exposed to the Chinese economy, and partly because they had already chosen their regional champions," said the report.

The final trend highlighted by the IFSWF was a move by SWFs to embrace India, with a "dramatic uptick" in investment in the country. SWFs made 42 investments worth $2.9 billion in 2017, up from 33 valued at $1.7 billion in 2016.