Invesco finds sovereign investors' interest in private markets growing

Sovereign investors are showing increased interest in private markets as they revisit their allocations in light of changing interest rates and inflation, Invesco said in its global sovereign asset management study released Monday.

The 10th annual study covers the views of 139 CIOs, heads of asset classes and senior portfolio strategists at 81 sovereign wealth funds and 58 central banks, managing a collective $23 trillion in assets.

Rod Ringrow, head of official institutions at Invesco, said in an interview that in this year's study, "what stuck out for me was the continued decline in fixed income, but also the rise in private markets," and that time horizons are getting longer.

"It is telling that they are increasingly allocating to illiquid alternatives. They are able to take that illiquidity premium," Mr. Ringrow said. "We see it continuing."

The study found that 59% of sovereign investors have repositioned their portfolios to take advantage of rising interest rates. They are also cutting duration, Mr. Ringrow said.

Sovereign wealth funds' fixed-income allocations have declined steadily in recent years but instead of being redirected to public equities, they are going to private market alternatives, notably real estate, private equity and infrastructure.

Private assets now average 22% of portfolios, the highest proportion on record. For sovereign wealth funds with $100 billion or more, that increases to 27%.

Today, sovereign wealth fund investors own $719 billion in private assets, up from $205 billion in 2011, Invesco found.

For 71% of respondents, private markets are seen as effective inflation hedges. The most popular asset classes cited were private equity, with 29% expecting to increase allocations over the next year, followed by 23% looking at private real estate.

Interest in equities was basically unchanged at 32% of portfolios, but 12% of respondents expected to decrease allocations to fixed income and 4% said the same for cash.

Invesco also noticed several central banks using ETFs to access the markets.

Until the Ukraine invasion, there had been a tilt away from Europe, Mr. Ringrow said.

Due to the rising interest in real assets, "there is more demand than there is supply," Mr. Ringrow said. As prices rise for real assets, there have also been more collaborations with external managers. More than half of sovereign wealth funds have developed strategic partnerships with third-party asset managers, Invesco found. "The biggest interesting trend is the number of partnerships with an asset manager,"Mr. Ringrow said.