Average sovereign wealth fund asset allocations into private markets have steadily increased, despite some funds’ assets under management declining.
State Street Global Advisors released a report citing data from Institutional Investor’s Sovereign Wealth Center on Monday. It found that allocations to private markets increased by 12.2 percentage points between 2007 and 2016, from 16.5 percent to 28.7 percent.
In an interview with Institutional Investor, Elliot Hentov, head of policy and research at SSGA’s Official Institutions Group, said three drivers increased allocations to alternatives: the low yield environment, the maturing and redefining of mandates, and growing pressure on some funds to generate more income.
“A lot of the funds matured and redefined their mandate more clearly as long-term investors so they could harvest the illiquidity premium,” Hentov said.
“It is more commonly assumed that people are looking at a 10 year-plus time frame, and that they should have more illiquids on their balance sheets because that suits their investment profiles.”
The SSGA report noted that analysts might expect shrinking institutional funds to move into cash or fixed income and out of riskier assets, but that hasn’t been the case.
“Funds with falling assets under management increased private market exposure by the same amount as funds with growing assets under management,” the report stated. “They supported this increase by reducing the share of public equity to maintain the same allocation to fixed income.”
[II Deep Dive: How Sovereign Wealth Funds are Changing Direction]
In a separate report, published last week by PwC, the professional consulting firm noted that SWFs are using alternatives to support domestic economic development and hedge against problems which investors may experience over the longer term. In a statement accompanying the report, Will Jackson-Moore, PwC’s global head of sovereign investment funds and private equity, said allocations to alternatives are likely to continue to be popular in the coming years.
“They can offer increased diversification, principal protection, a hedge against inflation, and an increase in portfolio performance,” he said. “That being said, finding the right allocation strategy for these asset classes is crucial as including certain alternatives might introduce a new set of risks such as illiquidity, complexity, and cyclicality.”
However, Monday’s SSGA report noted that sovereign investors were early into some alternative asset classes, like private equity. “The space is more crowded now,” the report states. “...and there are questions as to whether investors receive an adequate illiquidity premium.”