(August 6, 2013) — Alternative asset classes are piquing the interest of sovereign wealth funds (SWFs), but asset managers will have to work hard to win any of their money.
A report from research specialists Cerulli has found 64% of asset managers believe alternatives will attract the most mandates from SWFs over the next 12 months.
However, they believed SWFs would only be interested in private equity or infrastructure assets. None of the asset managers questioned believed the funds would allocate more to hedge funds, commodities, or any other sort of alternative.
This could create something of a problem for the asset management community—there are relatively few dedicated infrastructure specialist fund managers, meaning SWFs are more likely to gain exposure through entering co-investment models, or by buying something outright.
There are examples of SWFs already buying into these asset classes: Singapore’s Government of Singapore Investment Corporation had invested 11% of its fund into private equity and infrastructure as of March 2012, often seeking to be a co-investor or provide the seed money for a new fund, according to Cerulli’s report.
The Korea Investment Corporation has also increased its exposure to alternatives, from nothing in 2007 to 6.1% in 2012.
Its former CIO Scott Kalb believed a 20% allocation would make sense given the low correlation with other asset classes and the potential for long-term growth. Despite his departure in June 2012, the trend is expected to continue, as his replacement Dong-ik Lee was a former head of a private equity/venture capital firm.
Elsewhere, China Investment Corporation’s allocation to alternatives is understood to have reached 12% in 2011, while the Abu Dhabi Investment Authority’s (ADIA) is believed to have built up a 10% exposure (although that is likely to have used hedge funds and managed funds), as well as 5% in infrastructure.
And that is before you consider those who started out putting alternatives at the forefront of their portfolio planning, such as the Australian Future Fund. As of March 2013, 15.3% of the Aussie fund was in alternatives (largely hedge funds), 6.5% in infrastructure and timberland, and 6.8% in private equity.
If you needed any further evidence, consider this: most of the new arrivals at SWFs in the past year have been hired for alternatives roles.
Cerulli highlighted ADIA’s hires of Colm Lanigan as head of principal investments in private equity and John McCarthy as global head of infrastructure, and the Saudi Arabian SWF Sanabil’s hires of private equity specialist John Breen and former Grenfell Private Equity executive Scott Lanphere.
For asset managers keen to get a bite of the cherry, seeking out the younger SWFs could be the way forward.
Many of the fund managers quizzed by Cerulli on the topic favoured approaching SWFs in frontier markets. When presented with a list, respondents said they considered Kazakhstan as the most likely source of new mandates, followed by Libya, Timor Leste, Mongolia, and Ghana.
Cerulli director Barbara Wall said: “The big are getting bigger and funds at the frontier provide a fertile ground for mandates, as they often start with large, external allocations.”
The full report can be read here.
Related Content: China Calls on International Investors for Infrastructure Push and SWFs are Doing it for Themselves