Sovereign wealth funds continue to expand in-house management capabilities, a trend that could see them morphing — in the eyes of private markets money management firms — into competitors or collaborators from clients.
“Sovereign wealth funds are becoming scale direct investors,” a trend that's seen them moving away from the fund and co-investment vehicles they focused on for past investments, said Suvir Varma, a Singapore-based partner with Bain & Co. SE Asia Inc., in a recent interview.
“Like any changing relationship ... both sides need to find a balance as they move forward,” he said.
The move by official institutions away from funds when investing in private equity, real estate and infrastructure, with co-investment as the initial step, is a sensible one from the asset owners' point of view in many cases, noted Terrence Keeley, a New York-based managing director and head of BlackRock Inc.'s official institutions group.
That evolution is partly an issue of scale, some market veterans contend.
Sovereign wealth funds are absolutely building internal capabilities as they become both bigger and more mature, in part reflecting the “supply-demand conundrum” of finding enough managers for the sizable allocations they're looking to make now to capacity-constrained, private market segments, said Wayne G. Bowers, London-based executive vice president and CEO, asset management — EMEA & APAC, with Northern Trust Global Investments Ltd.
Larger sovereign wealth funds “don't have the option” of emulating David F. Swenson, the chief investment officer of Yale University's $24 billion endowment funds, in his exclusive reliance on external managers to invest the endowment's targeted 78% allocation to private markets, agreed David Neal, Melbourne-based managing director of Australia's A$117 billion ($89.5 billion) Future Fund.
The commitment to internalization among sovereign wealth funds and other big institutional investors shows no signs of abating, even if that growth is still coming off a fairly low base, said Mr. Neal.