Sovereign wealth could be a game-changer

They have gradually been making their presence felt, and many feel SWFs will soon become more ambitious when it comes to private debt.

Sovereign wealth funds “have started to develop a big appetite for private debt globally”, according to Sikander Ahmed of Kuwait-based fund manager NBK Capital Partners, quoted in our upcoming May issue cover story.

Major players in other asset classes such as real estate and infrastructure, SWFs have been slow to join the private debt party. But with interest rates at record lows and with institutional investors of all stripes hunting for yield – considered alongside the volatility in public equities and fears of a private equity bubble – it is no surprise that observers have noted SWFs forming partnerships with existing private debt GPs through the likes of co-investments and stake purchases.

Last year felt like a sea change in the involvement of SWFs in private debt with numerous striking initiatives launched. Among them were two direct lending partnerships established by Abu Dhabi’s Mubadala – one worth $12 billion with Apollo Global Management and the other a $3.5 billion tie-up with Barings.

Thus far, such arrangements remain a rarity. According to estimates cited in the cover story, only 10 sovereign wealth funds currently have “meaningful” exposure to private credit. However, there is evidence of increasing participation, with SWF allocations rising from 2 percent of their portfolios in 2015 to 3.2 percent by January of this year.

With such deep pockets, it is vital that SWFs invest in areas with sufficient scale. Despite a fundraising slowdown over the past year or two, we have charted the impressive rise of private debt since the global financial crisis. Moreover, its far from the end of the growth story – the direct lending market alone is tipped to double in size to $1.5 trillion over the next few years.

What market sources tell us to expect is SWFs looking to transition from partners to leaders as the years go by – relying less on backing funds and more on doing deals directly as they build in-house investment teams. This, after all, is the approach they have taken with other asset classes such as real estate and infrastructure as they look to save money on fees and carried interest.

In time, some of the fund managers SWFs have been partnering with as they learn the ropes may become direct competition. The signs are growing that SWFs are beginning to change the game.

Write to the author at andy.t@peimedia.com