Enter the Dragon (year): Predictions for sovereign wealth funds
Sovereign wealth funds frequently have dual mandates -- to build wealth for future generations as well as participate in the economic growth and development of their local economies.
As part of their emphasis on boosting domestic economic growth, they have shown an increasing appetite for green investments.
Because they do not have long-term liabilities such as pension funds or insurers, wealth funds are relatively freer in the asset classes they choose to invest in.
As such, they are fairly significant investors in private markets, and are also active investors in co-investing and direct investment opportunities.
As we head into the Year of the Dragon, we expect these trends to continue, although a handful could continue to look at setting up outposts in overseas markets.
GOING GREEN
SWFs are likely to persist in their pursuit of environmentally responsible investments driven by government policies, technological innovation, and the desire for diversified, sustainable long-term financial returns.
The commitment of wealth funds such as Singapore's GIC for solar projects in Asia-Pacific, as well as its commitment to green hydrogen, are indicative of this growing trend.
We've already seen significant investments in green initiatives, such as the Saudi Arabian Public Investment Fund's (PIF) investment in ACWA Power, which focuses on renewable energy generation and desalination plants. ACWA Power also has projects in Southeast Asia.
As we look to 2024, we expect there will likely be an increased emphasis on sectors such as eco-friendly real estate, electric vehicle charging infrastructure, and energy storage technologies - building on patterns established by investors like the Abu Dhabi Investment Authority (ADIA) in 2023.
PRIVATE MARKET EXPANSION
While most SWFs are fairly familiar with private investments as they invest in real estate and infrastructure projects quite frequently, it will be interesting to watch whether Norway's GPFG -- the world's largest SWF -- will consider private equity for the first.
That could have implications for Asia's growing private equity market.
More broadly, SWFs are also seeking more substantial stakes in private companies, particularly in growing industries such as biotechnology and artificial intelligence.
This reflects a broader ambition by sovereign funds to support sectors that not only promise significant financial returns but also contribute to economic diversification and the enhancement of a country's technological and healthcare capabilities.
CO-INVESTMENTS, NEW OFFICES
Undoubtedly, the major story from last year was the dynamic rise of Middle Eastern funds, particularly Saudi Arabia’s PIF, which led the charge in deal activity, deploying $31.6 billion in 2023 according to Global SWF.
In 2023, PIF championed the co-investment trend, leveraging partnerships to engage in large-scale, complex investments. These alliances enabled access to projects of significant scope, particularly within infrastructure and technology sectors.
Increasingly, they are also investing in Asia - and that trend is definitely set to continue in the Year of the Dragon.
PIF signed a memorandum of understanding with Hong Kong family office Tsangs Group late last year, to invest in technology ventures, focusing on sectors like renewable energy and robotics—as well as to further foster business between Hong Kong, the Greater Bay Area, and Saudi Arabia.
PIF is also reportedly considering whether to set up an office in India's Gujarat International Finance Tec-City (GIFT), and has previously agreed to form a joint task force for $100 billion in Saudi investment in India.
With India fast becoming the preferred country in Asia for sovereign investors, the Korean Investment Corporation also recently announced it plans to open an office in India by April this year.
Korea’s SWF has also actively been seeking joint ventures in infrastructure and technology.
PRIVATE CREDIT
SWFs have been demonstrating a growing fondness for the $1.6 trillion private credit market, with Mubadala's strategic investments serving as a notable example.
This shift was driven by the attractive combination of lower risk and reliable yields compared to volatile equity markets.
Private credit's appeal is rooted in its potential to offer stable returns and has been gaining traction over the past few years as investment banks and traditional debt investors have pulled back from leveraged debt amid fears around rate rises and an economic slowdown.
In June last year, Temasek intensified its investment in private credit through SeaTown Holdings, with plans to raise $1.5 billion for a new Asia-focused credit fund—reflecting a strategic push by the Singaporean fund into alternative lending and signaling strong confidence in the sector's growth.
Looking ahead to 2024, we can anticipate SWFs to intensify their focus on private debt, diversifying away from equity market unpredictability.
They are likely to channel more capital into sectors ripe for reform or experiencing growth, such as transformative infrastructure projects.