Asia-Pacific sovereign funds lift allocations to alternatives; U.S. an attractive investment destination: study

Spurred by declining growth worldwide and lower interest rates and returns, Asia-Pacific sovereign-wealth funds are increasingly allocating to alternative strategies.

Most sovereign funds invest directly in private markets but will partner with specialist PE managers for new and esoteric strategies, a recent Cerulli Associates report said.

Private equity firms with unique strategies, strong track records and deal-sourcing expertise will benefit from co-investment opportunities, the report said.

The largest Asian sovereign funds — Future Fund, China Investment Corp, GIC, Temasek Holdings, Korea Investment Corp and Khazaneh Nasional — had more than $1.7 trillion in AUM in 2017, the report said.

Most sovereign funds had large allocations to alternatives. For instance, China Investment and Australia’s Future Fund allocated almost 40 percent to alternatives.

In addition, Korea Investment was increasing its investment in alternative strategies and strengthening its overseas offices to take the lead, the report said.

U.S. allocations

The U.S. continued to be an attractive investment destination for Asia-Pacific sovereign funds.

It accounted for 39 percent of Singaporean GIC’s commitments and more than 55 percent of Korea Investment’s commitments.

Korea Investment was leveraging its U.S. office to find more investment opportunities and asset managers in the alternatives space, the report said.

U.S.-China trade tensions could lead China Investment to reduce its U.S. portfolio, the report said.

But China-U.S. Industrial Cooperation Fund, a partnership of China Investment and Goldman Sachs, would target $5 billion of investment in American companies that had, or can develop, a material business connection to China in manufacturing, industrial, consumer and healthcare industries, the report said.

PE allocations

GIC was the most active Asian private equity investor in 2018 with 11 deals in PE, infrastructure and venture capital.

It had an 11 percent allocation to PE, the report said.

Recent investments included Indonesia’s Go-Jek , the buyout of Net A/S and a $40 million investment with Sequoia Capital in Korean startup app maker Toss.

GIC was an early mover in infrastructure and venture funds and had invested in more than 50 tech growth companies in eight countries to date.

China Investment approved or signed agreements for 49 PE, private-credit and real estate projects in 2017, the report said.

In addition, two-thirds (62.6 percent) of the sovereign fund’s total assets were managed by external managers, the report said.

Future Fund increased its PE allocation to 14.1 percent as of June 30, 2018, from 10.1 percent 15 months ago.

But Future Fund avoided large names like Kohlberg Kravis Roberts, Carlyle Group, CVC Capital Partners and TPG Capital, the report said.

Instead it invested in Seidler Equity Partners from Los Angeles and Xiang Ge, a VC focused on China’s TMT industry, the report said.

Seidler’s portfolio includes LA Fitness, Rawlings, Harmar Mobility and International Studies Abroad.

Korea Investment’s PE portfolio increased to 4.9 percent in 2017 from 4.2 percent in 2016. It was 3.6 percent in 2013, the report said.

Action Item: Read more from Cerulli here: https://bit.ly/2RBjPO5