Middle East sovereign wealth funds are boosting their investment in unlisted companies and increasingly bypassing private equity funds as they seek higher returns.
Sovereign wealth funds in the region, which are managing about $1.8tn, are allocating between 13 per cent to a third of their new investment to private equity, a volume exceeding their property and infrastructure allocations, according to a report by US-based asset manager Invesco, which surveyed 120 senior investment professionals in the region.
“Contrary to popular perceptions, these vast state funds are not piling into global property and global infrastructure projects,” said Nick Tolchard, head of Invesco in the Middle East. “Many of them are boosting teams [in private equity].”
Middle Eastern state-backed funds are increasingly investing directly in companies, rather than through private equity funds, which typically charge 2 per cent in management fees and levy 20 per cent on gains. “The indication is that the vast majority of this private equity investment is direct,” Mr Tolchard said.
The survey differentiates, without naming them, between“development” funds which have an obligation to help their country’s economy in the short term and therefore tend to be less risk averse, and so-called “investment” funds, which typically have been established for longer and work to preserve wealth for future generations. Abu Dhabi’s Mubadala and Qatar’s funds would typically be considered as development funds while Abu Dhabi Investment Authority or Kuwait Investment Authority would generally fit in the second category.
Development funds have tripled their allocation of new assets to private equity in the past 12 months from 10 per cent in 2012 to a third, according to the survey. This compares with only 3 per cent allocated to property and infrastructure.
So called investment funds have on average allocated 13 per cent of new assets to private equity, up from 9 per cent in 2012 and 5 per cent in 2011 – and their investments in property and infrastructure have fallen from 25 per cent in 2012 to 9 per cent in 2013.
Investment funds tend to favour co-investment models, whereby they invest alongside a private equity fund manager that they already back through a fund, while development funds are building teams to conduct their own deals.
US public pension plans, some of the largest and oldest backers of buyout funds, have lifted private equity assets to 7.51 per cent of total assets, from 6.31 per cent in 2011, according to researcher Preqin.