Sovereign wealth funds manage more assets than the combined holdings of the world’s hedge funds and private equity firms. Their appetite for alternative assets, already large, is only going to grow. In fact, a Morgan Stanley economist recently predicted that sovereign wealth funds would funnel $200 billion globally to alternative fund managers—including those managed by hedge funds and private equity firms—in each of the next five years.
But so far mid-market buyout shops haven’t had much luck cracking the market.
Most of the big sovereign wealth funds continue to concentrate their bets in the hands of a small number of U.S.-based buyout firms, a strategy that often secures them special treatment in the form of generous terms and conditions not given to typical limited partners. For example, buyout firms often create separate accounts to house the money of sovereign wealth funds and to ensure that fees are eliminated or minimized; several shops have also sold stakes in their general partnerships to sovereign wealth funds. Stakes in general partnerships are generally viewed as advantageous to LPs, giving them greater visibility into a firm’s behavior and better terms on fund profits.
Sovereign wealth funds are “not simply looking for exposure per se,” said
The most recent example: the $4 billion fund announced in April by financial services specialist
That deal follows several similar ones over the last several months, all involving brand-name buyout firms.
To be sure, not all deep-pocketed government asset managers require special treatment. Singapore’s two sovereign wealth funds,
But whatever their strategies or requirements, these government investment funds unquestionably have money to put to work. With a collective $3.5 trillion of assets under management, sovereign wealth funds already account for an estimated 10 percent of global private equity commitments, equivalent to about $150 billion. The big questions now: Will mid-market buyout firms find a way to share in the bounty, or will they continue to be shut out?