When Pensions & Investments launched in 1973, very few sovereign wealth funds were in existence: Among the top five funds by assets, according to the Sovereign Wealth Fund Institute, just the $803 billion Kuwait Investment Authority, Kuwait City, had been established (under a previous guise and in 1953).
The world's largest fund, Government Pension Fund Global, Oslo, with $1.48 trillion in assets, was established in 1990; Beijing-based China Investment Corp., with $1.35 trillion, was founded in 2007; SAFE Investment Co., Hong Kong, with $1.02 trillion was established in 1997; and Abu Dhabi Investment Authority, Abu Dhabi, with $853 billion in assets, was founded in 1976, according to the institute.
Sovereign wealth funds are the "strongest growth component of the institutional market worldwide," said Thorsten Heymann, senior adviser for Europe at Casey Quirk, a Deloitte company. "DB in the U.K. is in decline, in the U.S. it is in decline — but here are big, institutional investors, gathering substantial inflows and some don't have liabilities. That's very interesting for asset managers," he said.
And they're particularly interesting for private markets managers. One reason is that they have longer-term investment horizons than other types of investors — perfect for the illiquid asset classes.
"For several reasons, sovereign wealth funds are much more attractive to private market asset managers," said Ray Joseph, CIO at capital markets firm Axxes Capital. "SWFs focus their long-duration, large pools of capital on longer-term investment horizons and seek to gain additional alpha by giving up their liquidity premium. SWFs typically have no or limited payout obligations in the near term, so their investment horizon and return targets align with the 10- to 15-year cycle of most private market fund investments," Joseph said.
Wealth funds years ago had export earnings or a commodity-related link, and "almost all were exclusively looking at when that commodity (or source of money) runs out," said Rod Ringrow, head of official institutions at Invesco. "They were very much long-term, traditional sovereign investors, investing for the long term, mostly in equities and fixed income. Now they've migrated to different asset classes, and as our survey (the Invesco Global Sovereign Asset Management Study) picked up, the average investment time horizon" has extended to 11.3 years from 10.7 years reported in 2022. "They're moving more into the private markets space," he said.
Other money managers agreed. "Over the past couple of years, we've seen SWFs become a dominant force in the alternatives area of the market, particularly in relation to direct or co-investments opportunities," said Linso Pals, head of Europe (ex-U.K.), Middle East and Africa institutional business at J.P. Morgan Asset Management. "Unlike pension and insurance companies in Europe, where the philosophy of liability-matching tends to be their North Star, SWFs are less bound by this philosophy. Instead, there's a greater focus on total-return investing. This focus has led SWFs, particularly in the Middle East, to invest in higher-return assets," Pals said.
By 2022, sovereign wealth funds' direct investments in infrastructure, for example, had grown to $17 billion, or 25% of total infrastructure investments — up from $6 billion or 13% of total investments in 2018, according to the International Forum for Sovereign Wealth Funds.
The private credit market has been a particular area of development over recent years. The $284 billion Mubadala Investment Co., Abu Dhabi, for example, established a strategic partnership with Ares Management to invest across the credit sector in 2017. Its latest example came in March, when the two firms formed a joint venture to deploy an initial $1 billion in global credit secondaries opportunities. Mubadala Capital — the sovereign wealth fund's wholly owned asset management subsidiary, also agreed to acquire 90.01% of the equity of Fortress Investment Group that was held by SoftBank Group. Mubadala Capital already held a 9.99% stake in Fortress through private equity funds, meaning it owns 70% of Fortress equity.
Private markets firms and SWFs "can learn together and go into new asset classes or areas, and we've seen this in the private debt space quite a lot over the past couple of years," said Victoria Barbary, director of strategy and communications at the International Forum of Sovereign Wealth Funds. "There's a feeling of stability in (partnering) with some of these big, long-term investors that are very established."
The shift to a new investment environment — away from the lower-for-longer interest-rate environment — has brought about "an understanding that you have to try some new things in the need to find alpha," she said. Some of the larger sovereign wealth funds can embark on these partnerships, which "can potentially go into new areas and explore new potential pockets of return, and that means (the manager and the investor) are both learning. There's always room for innovation, and the big, sophisticated investors can do this because they understand the risks and returns; whereas some other sovereign wealth funds don't feel comfortable taking those risks," Barbary said.
Some sovereign wealth funds are expanding into new — and perhaps unexpected — territories, too. The roughly $700 billion Public Investment Fund, Riyadh, for example, announced an agreement to unify the game of golf on a global basis. Alongside the PGA Tour and DP World Tour, the agreement pulls together PIFs golf-related commercial businesses and rights, including LIV Golf, and the commercial businesses of the PGA Tour and DP World Tour, creating a collectively owned, for-profit entity. PIF will also make a capital investment into the new entity to facilitate its growth and success, the wealth fund said in a news release in June. The deal is still pending approval.
Sovereign wealth funds have gone through phases of outsourcing, insourcing and creating partnerships. "If they see something that's good, they will allocate capital to it," Invesco's Ringrow said.
There is also a continuing and increasing "requirement for knowledge-share to the sovereign sector from the private sector. Increasingly, we see RFPs saying 'how many training slots will you give us per year, how will you share your knowledge with the portfolio you're going to manage with us?' That's becoming a focal point," Ringrow said.
Invesco runs a sovereign training program every year in the middle of October, with around 40 attendees. "That fulfills a training requirement generally, and on top of that, typically, we have most investors asking for a specific training assignment, either related to a mandate you're managing or a new asset class. They're looking to raise the bar. (They're) looking for what you do as a manager and to take away best practice. We see that trend growing exponentially," he added. Invesco had a total $1.49 trillion in assets under management as of Sept. 30. It reported $9.4 billion managed for sovereign wealth funds as of Dec. 31, according to Pensions & Investments data.
Sovereign wealth funds have also been skilling up in other areas — specifically ESG considerations and governance.
The new partnerships "goes to show that they have become integrated and respected as partners of choice for the financial services community," IFSWF's Barbary said. The IFSWF has long worked with its member wealth funds on governance, and the funds themselves have also worked on "governance, skilling-up, being active and listening to the markets and learning from them, and taking advantage of having large pools of capital to tap expertise," she said.
She said sovereign wealth funds, which are not and cannot be regulated, have also been encouraged to embrace ESG and other standards as they've been counterparties to other — regulated — entities such as money managers.
The money managers that are and will continue to be most successful with sovereign wealth funds are those that also have stepped up their games when it comes to building relationships.
"The larger ones have developed their own coverage groups — you have to be present, which is why asset managers over time have developed local presence, in particular in the Middle East, to have proper coverage with the big funds there. How close you are and how big the relationships are will make a difference down the road," Casey Quirk's Heymann said.
These types of investors "will continue to influence the asset management community's investment strategies and client service approaches," Axxes Capital's Joseph agreed. "Offices are being established in the Middle East, Asia, and other parts of the globe to ensure seamless access to private market investment resources and information."
Private market managers are also forming dedicated teams to focus exclusively on wealth funds or specific regions, he said, "aiming to capture a larger share of this capital, especially since management fees provide a cushion for firms during economic downturns or market dislocations," Joseph added.
Another change sources are seeing among sovereign wealth funds is the reason for their creation. More are being created for development purposes, Barbary said — that is, "to invest at home."
Invesco's Ringrow agreed, adding that probably most of the growth of sovereign wealth fund assets the last 15 years has come from the creation of wealth funds that have a specific domestic focus on diversifying the economy, such as Mubadala. There will still be the large sovereign wealth funds that grow out of oil and gas-related revenues, "but smaller and newer (wealth funds are) going to have this domestic, structural bias," Ringrow said.
Barbary said that trend is coupled with what she terms strategic investments being completed by entities other than traditional sovereign wealth funds, such as a state-owned enterprise.
Governments "want the wealth fund to focus on what they're doing. I see sovereign wealth funds doubling down on what they do best — create long-term returns for their stakeholders. Most of our new members are domestic funds, and that is a really important way of governments putting public money to work for profit in a way and at a scale that's much more significant, and becoming more significant than we've seen in the past. And they are unlikely to be oil or gas (focused and financed) — other sources of government wealth, perhaps even transition metals, may be tapped," Barbary added.