Shifting Preferences Among Sovereign Wealth Funds

Sovereign wealth funds completed more direct investments in 2017 than a year earlier, according to a report published by the International Forum of Sovereign Wealth Funds. Yet the amount funds invest in private markets has slowed, likely because of a pullback from real estate in favor of growth-stage investments.

The “Dealing with Disruption” report found that SWFs—funds set up by governments to manage financial assets—completed 303 direct deals last year, up from 290 in 2016. Deal value, however, was $52.6 billion in 2017, up only slightly from $51.4 billion the prior year.

Part of that drop came from real estate, which has been a popular investment target for SWFs in recent years. That trend appeared to slow in 2017 as the number of real estate and infrastructure investments declined. Despite the overall drop, funds continued to show an interest in mixed-use and residential properties as they seek to capitalize on aging populations looking to downsize and millennial buyers in need of affordable housing.

Meanwhile, direct investment in innovative sectors, such as new medical devices and artificial intelligence, seems likely to continue, according to the report. SWFs have demonstrated an appetite for investing in technologies with the potential for large-scale disruption.

The report found that median equity check size in 2017 was $50 million, down from $90 million in 2016, likely a reflection of less activity in real estate, where investment value is typically higher, and more early-stage investing, associated with lower check sizes.

Another emerging trend revealed the increased favor private equity firms are showing SWFs as co-investors. As limited partners in PE funds, sovereign wealth funds are increasingly purchasing minority stakes in deals. “This enables the PE firm to book some profit, while the SWF can take on some upside by investing in growth businesses they already know, limiting the downside risk,” according to the report.

This story originally appeared in the November/December 2018 print edition of Middle Market Growth magazine. Read the full issue in the archive.