Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Sovereign Wealth Funds – The Other Eye on the Present

Published 2021-09-24, 06:43 a/m
Updated 2021-06-11, 03:35 a/m

Sovereign wealth funds (SWFs) – the titans in the venture capital (VC) world – squirrel huge reserves of capital that shore up a country’s economy under stress and help spread the risk. SWFs’ immediate response to the COVID-19 pandemic has been a blend of contrarian investments and drawdowns to steady the economy. However, these funds are shrewder and smarter than they were during the global financial crisis. Currently, they are revisiting their investment strategies, keeping an eye on the economic downturn powered by the COVID-19 crisis. As of August 2021, the world economy boasted 151 SWFs, with disclosed assets under management (AuM) at USD10.9tn, or c.10% of the worldwide AuM.

 

Weathering the storm

Funds like Singapore’s Temasek Holdings act as ‘rainy day’ funds, plugging the funding gaps created by the decline in oil prices and economic downturn owing to the fallout from the COVID-19 pandemic. In a similar vein, Kuwait’s government has sought permission from the parliament to withdraw USD16.5bn from the country’s USD600bn SWF – the Future Generations Fund – to finance the country’s spiralling debt owing to the pandemic, the first such incidence after the Gulf War.

While overseas investment remains SWFs’ chief focus area, the trend towards domestic deals has accelerated during the recent pandemic. For instance, Turkey’s fund injected USD3.1bn into three state banks, and Singapore’s Temasek Fund recapitalised Sembcorp Marine state’s struggling rig-building sector by backing a USD1.5bn rights issue. Similarly, SWFs in Norway, Iran and Nigeria are funding their government through increased dividend distribution or withdrawals. Ireland is also using its SWF to help small and medium-sized enterprises augment their liquidity in the wake of the pandemic.

Temasek and Australia’s Future Fund were utilised to fund the scientific research for the development of a COVID-19 vaccine. Similarly, Russia’s SWF – Russia Direct Investment Fund (RDIF) – financed the production of the promising drug Avifavir in 17 countries, which is the first drug to be approved for the treatment of COVID-19. This highlights the fact that not all domestic assistance is financial.

SWFs asset allocation

asset allocation

SWFs, targeting primarily traditional investments (listed equities and government and corporate bonds), were skewed towards fixed-income securities prior to the outbreak of the pandemic. However, as per an Invesco survey, SWFs are shifting from fixed income to equities to seek liquidity. This can be observed in the company’s ninth Global Sovereign Asset Management Study, reflecting SWFs’ fixed-income allocation, which dipped to 30% in March 2021 from 34% in March 2020 (vs 26% to 28% for equity over the same period), underlining opportunities amid volatile market conditions.

The yearly growth in equity value of SWFs’ direct investments in biotechnology has ratcheted up, translating into increased solutions for health information systems (e.g., vaccines) or applied artificial solutions. Major beneficiaries include China’s tech companies, such as video streaming firm Kuaishou and game developer Tencent, funded by Singapore’s Temasek Holdings via the Tencent industry Win-Win funds.

SWFs equity growth in biotech sector

Sustained robust M&A volume

Despite the havoc wreaked by the pandemic on the world economy, SWFs did not hesitate to pursue opportunities in both growth equity and VC. Asian SWFs were noticeably investing in real estate niches such as data centres and self-storage. In 2020, SWF investments recorded 294 private market investments amounting to USD77.16bn (vs 301 investments for USD74.73bn in 2019). Private equity (PE) sponsors remain the most active dealmakers, with private-equity-backed buyouts amounting to 17% of M&A activity, the highest since 1H07.

Logistics and biotechnology

The COVID-19 pandemic has led SWFs to venture into other asset classes and industries, thereby bringing diversification and making the portfolio more resilient. A rapid surge in investment properties was noticed in the logistics space, such as warehousing, rather than offices and retail buildings. As per Global SWF, logistics made up c.22% of the funds’ real-estate investments in FY 2020 (vs 15% in FY 2019), whereas spending in offices and retail property slid to 36% and zero, respectively in FY 2020 (vs 49% and 15% in FY 2019). Following the trend would be Temasek Holdings, which invested USD500m in e-commerce firm Tokopedia (based in Indonesia) in June 2020.

Way forward

The future role of SWFs would hinge on the deep understanding of how stimulus from central banks counters the pandemic, pushing the value of shares and other assets. The growth in SWFs and their assets contributes to long-term growth by supporting post-pandemic economy. A direct example of this is SWF Russian Direct Investment Fund, which partly financed the development of the Sputnik V Vaccine. Another example is of Temasek’s joint venture with DBS, Standard Chartered (LON:STAN) and the Singapore Exchange to create Climate Impact X, a Singapore-based global carbon exchange and marketplace.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.