Sovereign wealth funds are adjusting their allocation focus to account for higher interest rates and inflation, as well as demands for more climate-sensitive investments.
“Inflationary pressures are being fueled by reflationary fiscal and monetary policies, national industrial strategies aimed at reshaping supply chains, and extensive public investment to tackle climate change through mitigation and adaptation efforts,” according to the International Forum of Sovereign Wealth Funds’ annual report.
State-owned investment organizations seek to diversify their investments in “a more uncertain, higher interest rate environment,” the report stated.
They are moving away from more volatile, cyclical sectors like consumer goods and software, which they have favored for the last five years, toward more capital-intensive industries. As long-term investors, the IFSWF wrote, these funds “have a competitive advantage over shorter-term asset allocators.”
As of 2022, SWFs made up 38.9% of total assets among the world’s largest 100 asset owners, up from 32% the year before, per research from WTW’s Thinking Ahead Institute.
Sectors. The funds have moved beyond an emphasis on software and services technology to investing in artificial intelligence, semiconductors and hardware, plus infrastructure for renewable energy, the IFSWF report said.
For example, Mubadala Investment Co., one SWF in the United Arab Emirates, co-invested with funds advised by private equity firm KKR in the acquisition of CoolIT Systems. The Canadian company, which operates across North America and China, specializes in liquid cooling systems for the world’s most demanding computing environments, such data centers.
The U.S.’s Inflation Reduction Act of 2022 and the European Union’s Green Deal Industrial Plan and Net Zero Industry Act aim to bolster greener economies with subsidies and tax incentives. Over the past couple of years, these laws have led to 27 SWF deals totaling $3.2 billion in industrial investments in green hydrogen and sustainable aviation fuels. In 2023, the European framework led to SWF funding for 25 deals versus just three such transactions in 2022.
One notable recent SWF action: The Qatar Investment Authority, Singapore’s Temasek Holdings and venture capital firm Decarbonization Partners co-led a $542 million capital raising for Ascend Elements, a U.S.-based maker of battery materials for electric vehicles.
Real estate. Property is a key component of SWFs’ portfolios, comprising a fifth of their direct investments, according to the report. And last year, their real estate investments increased almost 50% to $14.8 billion, mostly due to new purchases, the most since 2018. It had fallen off in recent years due to high valuations, which encouraged the funds to deploy more of their capital elsewhere. But current high interest rates cooled off the prices and SWFs are interested again. Now, the report noted, SWFs see real estate’s “potential to stimulate economic growth while providing a hedge against inflation.”
The report found, “The robust post-pandemic rebound in investments in hotels and resorts highlights sovereign wealth funds’ pivotal role in supporting large-scale infrastructure projects aimed at economic diversification and growth in their home markets.” For instance, Saudi Arabia’s Public Investment Fund is bankrolling Neom, a new megacity on the Red Sea Coast, to the tune of $1.5 trillion.
Venture capital. One area that has suffered in recent years is VC, a trend that extends far beyond sovereign wealth funds. High interest rates and a slowdown in initial public offerings, which provide the exits where VC investors get their big payday, are to blame. SWFs participated in only 31 venture fund-raising rounds in 2023, down from 97 in 2022.
The major exception was Singapore-based GIC and Temasek’s participation in a $6.5 billion VC fund-raising round targeted at pre-IPO e-commerce payment processor Stripe Inc., a U.S. firm. “This investment highlights how sovereign wealth funds’ approach to investing in startups in 2023 was opportunistic,” the report observed. Adding to the allure was that Stripe’s valuation had come down.
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Tags: CoolIt, GIC, Mudabala, NEOM, Public Investment Fund, Qatar Investment Authority, Real Estate, sectors, sovereign wealth funds, Stripe, Temasek, Venture Capital