Why Private Equity is Increasingly Teaming up with Sovereign Wealth Funds
Sovereign wealth funds, with their vast resources, are playing an increasing role in private equity, helping deals get over the line at a time when the fund-raising environment for private equity is increasingly challenging.
Sovereign wealth funds (SWFs) are taking the lead in co-investment activity as the slowdown in private-equity fundraising and hurdles to dealmaking prompt limited partners and fund managers to team up, according to a recent report from S&P Global.[1]
Bloomberg adds in a separate report that ‘deep-pocketed sovereign funds are deploying billions of dollars to get private equity takeovers across the line, helping grease the wheels of dealmaking in a year when other funding sources are drying up’.[2]
Private equity is keen to tap financing from SWFs as higher interest rates raise the cost of borrowing to finance deals, potentially reducing their returns. Market volatility and falling valuations are also affecting private equity’s ability to raise funds. In 2023, fundraising across private markets is on track to fall almost 30%, according to a report released this month by Bain & Co.[3]
SWFs can be ideal partners. They tend to have large amounts of capital and large teams, adept in due diligence and risk management, and are not limited to small minority investments with passive governance rights.
Figure 1: Sovereign wealth fund participation in private equity surges in 2023
While SWFs have long been interested in gaining exposure to private equity, participation has increased sharply this year.[4] That reflects the diversification benefits provided by private equity, as well as the potential to generate outperformance over public equities even in the face of the headwinds facing the private sector. Singapore’s GIC, for example, recently said it remains optimistic about the potential for growth and profit in the private market.[5]
The world’s seventh-biggest sovereign investor has been increasing its exposure to private equity over the past few years, and is taking advantage of discounted deals as some investors seek to exit their positions. This increased exposure reflects GIC’s concern that the impact of the slowing global economy and the consequences of rising interest rates are yet to fully play out.
SWFs in the Middle East are also stepping up their activities. Benefiting from massive capital injections derived from higher oil revenue, they have been spending vast sums at home and abroad, according to the Middle East Institute.[6]
The Institute adds that, historically, Gulf SWFs have implemented a strategic investment shift so that instead of “parking wealth in low-risk, low-return assets, they have diversified their investments into more profitable areas such as private equity and listed shares”. The funds are now eager to target potentially high-growth areas such as “technology and innovation-driven companies, alongside high-priority sectors such as healthcare, logistics, renewables, broadband, and digital infrastructure” as they seek to diversify their economies away from fossil fuels.
The desire of SWFs to diversify their economies and investment portfolios suggests that the shift into private equity is unlikely to be a short-term trend. That should also have positive implications for private markets over the long term.
Key takeaways
The increasing involvement of SWFs is helping the private-equity sector overcome an increasingly challenging fund-raising environment.
SWFs, with their vast resources, professional expertise and, can be ideal partners.
Major SWFs have indicated that the trend of increasing participation in private equity is likely to prove consistent over the long term.
[5] Fagen Wasanni Technologies
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