Middle Eastern sovereign wealth funds (SWFs) are increasingly favouring investments in private markets including credit, infrastructure and real estate, although allocations to buyout firms are coming less popular, according to a report by asset management firm Invesco.
“Private markets are favoured by many sovereign investors [in the region] thanks to the long term and illiquid nature of many asset classes within this market,” Zainab Kufaishi, Invesco’s head of institutional sales Middle East and Africa, said in a statement.
“Good opportunities are seen in infrastructure and in private credit (debt that is not publicly traded), but respondents are seeing fewer attractive opportunities in private equity because of increased competition for assets and bidding up of prices.”
Middle East sovereign investors increased allocations to all four private market asset classes -- credit, infrastructure, real estate and the private equity -- examined in the sixth annual Invesco Global Sovereign Asset Management Study, published on Monday.
The proportion of regional investors surveyed who said they increased their allocations to private equity over the last three years stood at 22 per cent in 2018, while the same percentage of asset managers reduced their allocations to the sector, the report said.
A total of 22 per cent of those polled, enhanced their allocation to real estate segment, while 33 per cent boosted allocation to infrastructure. Private credit saw the biggest rise, with 44 per cent of investors increasing investments in the asset class.
Globally, investments into private markets have doubled over the past five years to account for 20 per cent of total allocations by the sovereign wealth funds, with infrastructure and private credit the most favoured asset classes in 2018.
"Over the last five years we've seen a general increase in private markets as sovereigns seek higher yields," Ms Kufaishi told The National by telephone. "Globally, private credit has attracted sovereigns as they identify opportunities created as banks pull out [of this segment] post the financial crisis and tightened regulations.
In the region, real estate has traditionally been an attractive asset class for sovereign investors and the trend is likely to continue. Although infrastructure is gaining prominence, there are challenges around execution of such transactions, she noted.
Over three-fifths (61 per cent) of global respondents to Invesco’s study were of the view that private equity is becoming overvalued. “We saw concerns about valuations of private equity [deals],” Ms Kufaishi said. Globally, however, investing in private markets has been a challenge for sovereign investors and many remain underweight.
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The study examines the investment behaviour of sovereign wealth funds and central banks, based on interviews with 126 individual sovereign investors and central bank reserve managers across the world, with combined asset value of $17 trillion. The total value of assets under management by Middle East sovereign investors reached $1.8t trillion, according to the survey.
The report this year showed that, globally, equities have overtaken bonds to become the lead asset class for sovereigns across active, passive and other strategies, with average equities allocation rising to 33 per cent in 2018 from 29 per cent in 2017. Sovereign investors see returns of 9.4 per cent on their investments in 2017, thanks largely to equity bull markets, up from 4.1 per cent in 2016, according to the report.
Middle East sovereigns are the most committed users of active management strategies, with an average of 65 per cent of portfolios being actively handled by the managers. Middle East sovereign investors also often pursue “opportunistic strategies in less traditional, less efficient markets where active management can potentially deliver significant [returns]”, the report noted.
Invesco also reported an increase in the popularity of some of the alternative investment classes, as sovereigns seek to realise a broader set of benefits from their portfolios. Although equities remain on the top, the average allocation to alternatives globally has doubled in the past five years, reaching an all-time high of 20 per cent in 2017, according to the report.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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