Sovereign wealth funds are adjusting their investment allocation focus to take into account rising interest rates and inflation, as well as demand for climate-smart investments.
“Inflationary pressures are being fuelled by reflationary fiscal and monetary policies, national industrial strategies aimed at restructuring supply chains, and large-scale public investment to tackle climate change through mitigation and adaptation efforts,” according to the International Sovereign Wealth Fund Forum’s annual report.
State-owned investment organisations are looking to diversify their investments in an “environment of greater uncertainty and rising interest rates”, the report said.
They are moving away from the volatile, cyclical sectors such as consumer goods and software that they have favored over the past five years and towards more capital-intensive industries. As long-term investors, the IFSWF says these funds “have a competitive advantage over funds with short-term asset allocations.”
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According to research from WTW’s Thinking Ahead Institute, as of 2022, SWFs will account for 38.9% of total assets among the world’s 100 largest asset holders, up from 32% the previous year.
SectorThe IFSWF report said the fund is moving beyond its focus on software and services technology to investing in artificial intelligence, semiconductors, hardware and even renewable energy infrastructure.
For example, Mubadala Investment Co., a UAE SWF, invested alongside a fund advised by private equity firm KKR to acquire CoolIT Systems, a Canadian company with operations in North America and China that specializes in liquid cooling systems for the world’s most demanding computing environments, including data centers.
The US Inflation Control Act of 2022 and the European Union’s Green Deal Industrial Plan and Net Zero Industry Act aim to bolster the green economy with subsidies and tax incentives. In the past few 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 injected SWF funds into 25 deals, compared to just three in 2022.
Recent notable SWF activity includes a $542 million funding round for Ascend Elements, a US-based maker of electric vehicle battery materials, co-led by the Qatar Investment Authority, Singapore’s Temasek Holdings and venture capital firm Decarbonization Partners.
real estateAccording to the report, real estate is a major part of SWFs’ portfolios, accounting for one-fifth of their direct investments. Last year, real estate investments grew by almost 50% to $14.8 billion, mostly from new purchases, the highest since 2018. In recent years, real estate investments had declined due to inflated valuations, prompting funds to allocate more capital elsewhere. However, current high interest rates have helped to calm property prices, and SWFs are showing interest in real estate again. SWFs now see in real estate “the potential to stimulate economic growth while providing a hedge against inflation,” according to the report.
“The strong post-pandemic recovery in hotel and resort investment highlights the crucial role of sovereign wealth funds in supporting large-scale infrastructure projects aimed at economic diversification and growth in their home markets,” the report said. Saudi Arabia’s Public Investment Fund, for example, is financing $1.5 trillion for the emerging megacity of Neom on the Red Sea coast.
venture capital. One area that has been hit hard in recent years is venture capital (VC), and not just by sovereign wealth funds, due to the slump in initial public offerings (IPOs), an exit point for VC investors to make huge profits, and high interest rates. SWFs participated in just 31 venture funding rounds in 2023, down from 97 in 2022.
The big exception was Singapore-based GIC and Temasek’s participation in a $6.5 billion venture capital funding round for U.S. e-commerce payment processor Stripe Inc. before its IPO. “The investment highlights how opportunistic sovereign wealth funds’ approach to investing in 2023 startups has been,” the report said. Stripe’s depressed valuation also adds to its appeal.
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Tags: CoolIt, GIC, Mudabala, NEOM, Public Investment Fund, Qatar Investment Authority, real estate, sector, sovereign wealth fund, Stripe, Temasek, venture capital
