Sovereign wealth funds, public pension funds ended 2020 with record assets
Since these investors hold an average 75% of their portfolios in liquid assets, the growth of the equity markets in 2020 (+13.1% gain in S&P Global 1200) has resulted in sovereign wealth funds and public pension funds (PPFs) ending the year with record assets under management of $9.1trn and $18.4trn respectively, according to the Global SWF Report 2021. The year saw two SWFs established - Fonds Souverain de Djibouti (FSD) and Indonesia’s Nusantara Investment Authority (NIA).
However, with the Covid-19 market volatility, capital invested by state-owned investors fell 19% in 2020 to $162.3bn in 503 transactions. “SWFs were especially affected given the actual and potential capital calls from their governments, while PPFs managed to ramp up their activity and to close a strong year overall,” stated the report. There is also a rising trend among countries to include a development function and domestic investments as a part of their mandate. Other funds opted to issue new bonds to alleviate their countries’ debt levels.
During the peak of the pandemic, deals were negligible due to logistical problems (lack of physical meetings), while later, SWFs were cautious since they could face capital calls to cover fiscal deficits. When compared to 2019 volumes, investments by SWFs dropped by 33% to $83.7bn in 280 transactions while capital deployed by PPFs slightly increased in both volume and value, up to $78.6bn in 223 deals.
Capitalising on the crisis, SWFs such as Mubadala, Public Investment Fund (PIF) or Temasek reacted quickly and acquired strategic assets while among PPFs, the Canadian funds stood out, with Canada Pension Plan (CPP) and Caisse de dépôt et placement du Québec (CDPQ) being the top spenders. Saudi Arabia's PIF was the best performer in a turbulent year, increasing its AuM to $360bn and its staff count to 1,000, becoming the most active SWF in public and private markets. Among PPFs, CPP was the most active and successful in terms of results.
Certain asset classes were sensitive with deals in real assets, including properties and infrastructure, recording the biggest declines. The number of deals among SWFs in this space was 29% totally (compared to 38% in 2019). These investors channelled their allocations into core real estate in major cities, targeting logistics, data centres, warehouses, senior facilities and student housings. Industrial products, healthcare and telecommunications and media saw more acquisitions when compared to energy and natural resources, financial services, and retail and consumer. In the technology side, the focus shifted from fintech and e-commerce into IT and biotech.
Regionally, state-owned investors scaled up their holdings in developed markets despite interest in emerging markets such as China and India. North America attracted 37% of the capital (vs 27% in 2019) while emerging markets received only 29% (vs 40% in 2019).
The report predicted that the size of the industry will be over $50trn by 2030, with more than 500 state-owned investors. There will be nine funds each with over $1trn AuM, and three additional funds with $2trn or more: Norges Bank Investment Management (NBIM), PIF and Dutch pension fund, APG. “We could see new significant SWFs forming in Germany, Japan or Taiwan, rather than in the US or the UK,” stated the report.