Sovereign wealth funds double direct investment in 2020
Institutional investors, including sovereign wealth funds (SWF) entered the Covid-19 pandemic with high cash levels, which allowed them to support local economy during the crisis and buy opportunistically in distressed international markets. The annual review of the International Forum of Sovereign Wealth Funds (IFSWF) revealed that 2020, which was a “bumper year” for deploying capital, saw SWFs doubling their direct investments, which almost doubled year-on-year from $35.9bn in 2019 to $65.9bn in 2020.
The overall investment activity increased markedly, and the value of investments doubled, stated the report titled Continuity in the Face of Upheaval. The higher median value of in vestments recorded in 2020 stood at $40m in equity, which could be an aberration since this value has been in decline since 2016. However, the trend was also noted in real assets, where median equity invested stood at $200m in infrastructure and real estate.
During the Covid-19 pandemic, countries with sovereign wealth funds had sufficient fiscal space to increase spending, respond to emergencies and lower taxes, if needed. The report cited the example of Chile’s Ministry of Finance, which withdrew $1.1bn from the Economic and Social Stabilisation Fund (ESSF) in August 2020 to finance the debt scheduled for the same month. Norway’s $1trn Government Pension Fund Global (GPFG) too made its largest contribution to the government, with the Ministry of Finance withdrawing almost $37bn (3%) of the wealth funds to tackle the country’s rising spending due to the pandemic.
SWFs, set up for strategic purposes, have been more directly involved in their government’s policy response and supporting the local economy. For example, the Ireland Strategic Investment Fund (ISIF) allocated €2bn to the Pandemic Stabilisation and Recovery Fund (PSRF), which invests in enterprises employing more than 250 employees with a turnover above €50m, provided that these businesses can demonstrate that they were viable even before the crisis. Another SWF, Singapore’s Temasek Holdings, was directly involved in supporting local companies with projects to improve the safety of Singapore citizens’ daily life.
More SWFs investing domestically
The annual review also highlighted that since 2015, SWFs had doubled their participation in local economies, in terms of the number of deals but were struggling to put more capital to work. In 2020, SWFs deployed 22% of all capital towards direct investments in their local markets, when compared to an average of 13% over the past five years.
Some SWFs had a combined approach. Saudi Arabia’s Public Investment Fund (PIF), which had supported the domestic economy during the crisis, invested more than $10bn in US and European blue-chip companies during the March 2020 stock market crash. SWFs achieved a risk-neutral level across asset classes by increasing allocation to equities, largely profiting from the lower prices in the first half of 2020.
For the first time, sovereign development funds and hybrid funds’ direct investments overtook those of savings funds. Terming this as a turning point, IFSWF added that more countries are launching sovereign investment funds, which seem to be a vehicle of choice for governments seeking to finance infrastructure projects or other sector-specific initiatives.
Besided, IFSWF noted that in 2020, sovereign wealth funds achieved 23 investments worth over $2bn in climate-change-related sectors, such as agritech, forestry and renewable energy. That formed a four-fold increase from 2016.