Private equity firms face a tough time as they raise billions in new funds for the first time since the financial crisis. Traditional large investors including US pension schemes are scaling back their exposure to the sector, leaving firms to turn to the likes of sovereign wealth funds to plug the gap. But one potential problem is that such funds are growing more willing and able to invest by themselves.
Given their long-term investment horizons, sovereign wealth funds appear natural bedfellows for private equity.
With the exception of funds that were subject to capital withdrawals to help balance state budgets – Russia’s Reserve Fund was drained of $35bn during 2010 according to data provider Preqin, with the Russian government understood to be looking to create a joint investment fund alongside other sovereign funds according to a press report last week – they are in a position to make commitments.
Over the past 12 months, sovereign wealth funds’ commitment to private equity has grown eight percentage points, with 59% of funds now investing in some form, be it in buyouts, secondaries, funds of funds or mezzanine, according to data provider Preqin.
However, the growth in appetite among SWFs may not necessarily translate into increased commitments for firms, with funds increasingly keen to follow the example of pension schemes such as the Ontario Teachers’ Pension Plan in investing directly or co-investing alongside buyout firms. Ontario has a history of direct investment, most recently participating in the purchase of the UK’s high-speed rail link between London and the Channel Tunnel in November.
Lower risks and fees
One Far Eastern wealth fund manager said: “We feel that in many cases, particularly buyouts and certainly funds of funds, we have the expertise to achieve the same level of returns without exposing ourselves to the same level of risk or fee structures that many GPs [private equity firms] are demanding.”
Leo de Bever, chief executive of Alberta Investment Management Corporation, a Canadian state-backed entity responsible for administering the province’s sovereign wealth fund, said: “There are good opportunities for the next 24 months, provided you stick to your knitting and do not leverage too highly.
"We will look to capitalise on those opportunities and our strategy will be to do the bulk of our investing directly, and we are actively expanding our team to achieve that. For deals between $200m and $500m we will look at going it alone and above that, we will look to co-invest alongside fund managers that we have confidence in to produce results.”
SWFs including KIC and the Qatar Investment Authority have recruited some of the talent shed by other financial institutions during the crisis, and are now more able to bid alongside or against private equity funds.
Nine direct co-investment deals worth a total of $801m were completed in Europe alone last year, according to data provider Dealogic, an increase of 10% on 2009.
While SWFs are unlikely to abandon private equity funds entirely – Dubai World is the only sovereign wealth fund in the top 10 by assets under management to exclusively focus on direct investments – all but the most exemplary fund managers will have to offer unique opportunities that appeal to an SWF’s strategic priorities to gain favour.
Source: www.efinancialnews.com
Given their long-term investment horizons, sovereign wealth funds appear natural bedfellows for private equity.
With the exception of funds that were subject to capital withdrawals to help balance state budgets – Russia’s Reserve Fund was drained of $35bn during 2010 according to data provider Preqin, with the Russian government understood to be looking to create a joint investment fund alongside other sovereign funds according to a press report last week – they are in a position to make commitments.
Over the past 12 months, sovereign wealth funds’ commitment to private equity has grown eight percentage points, with 59% of funds now investing in some form, be it in buyouts, secondaries, funds of funds or mezzanine, according to data provider Preqin.
However, the growth in appetite among SWFs may not necessarily translate into increased commitments for firms, with funds increasingly keen to follow the example of pension schemes such as the Ontario Teachers’ Pension Plan in investing directly or co-investing alongside buyout firms. Ontario has a history of direct investment, most recently participating in the purchase of the UK’s high-speed rail link between London and the Channel Tunnel in November.
Lower risks and fees
One Far Eastern wealth fund manager said: “We feel that in many cases, particularly buyouts and certainly funds of funds, we have the expertise to achieve the same level of returns without exposing ourselves to the same level of risk or fee structures that many GPs [private equity firms] are demanding.”
Leo de Bever, chief executive of Alberta Investment Management Corporation, a Canadian state-backed entity responsible for administering the province’s sovereign wealth fund, said: “There are good opportunities for the next 24 months, provided you stick to your knitting and do not leverage too highly.
"We will look to capitalise on those opportunities and our strategy will be to do the bulk of our investing directly, and we are actively expanding our team to achieve that. For deals between $200m and $500m we will look at going it alone and above that, we will look to co-invest alongside fund managers that we have confidence in to produce results.”
SWFs including KIC and the Qatar Investment Authority have recruited some of the talent shed by other financial institutions during the crisis, and are now more able to bid alongside or against private equity funds.
Nine direct co-investment deals worth a total of $801m were completed in Europe alone last year, according to data provider Dealogic, an increase of 10% on 2009.
While SWFs are unlikely to abandon private equity funds entirely – Dubai World is the only sovereign wealth fund in the top 10 by assets under management to exclusively focus on direct investments – all but the most exemplary fund managers will have to offer unique opportunities that appeal to an SWF’s strategic priorities to gain favour.
Source: www.efinancialnews.com
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