A new report from TheCityUK shows that Sovereign Wealth Fund (SWF) investment could contribute to long-term growth by funding infrastructure and supporting post-pandemic economic development.
The report, ‘The UK as a leading centre for international sovereign wealth funds,’ supported by Clifford Chance LLP, makes clear that as well as being critical providers of global capital, SWFs are also increasingly looking to new industries and asset classes – including in green infrastructure, to diversify their holdings and increase returns . This presents an opportunity for the UK-based industry to look at new products and asset classes that will service this growing market and help further build the UK’s position as a key investment destination for SWFs.
The assets of SWFs are now larger than those of the private equity ($4.1trn) and hedge fund ($3.4trn) industries. In recent years, many sovereign wealth funds have been increasing their exposure to alternative assets, with 64% of funds now involved in infrastructure investments, followed by real estate (62%), private equity (60%), natural resources (59%), private debt (38%) and hedge fund investments (35%). SWFs’ investment globally into green assets increased to $11bn over the period 2015-2017 .
Anjalika Bardalai, Chief Economist & Head of Research, TheCityUK, said, “As a key source of patient capital, Sovereign Wealth Funds can have an important part to play in post-pandemic economic rebuilding. They are particularly good financiers of infrastructure projects, among other long-term productivity-enhancing investments, due to their long-term investment horizon. The UK government and industry should consider how it can adapt the country’s offer to attract more Sovereign Wealth Funds to locate and invest in the UK.”
Mohammed Al-Shukairy, Global SWF Group Lead at Clifford Chance and Regional Managing Partner, Middle East, said, “We expect the UK to remain a significant investment destination for many Sovereign Wealth Funds, for a variety of reasons, including its investor-friendly legal environment but also the continued inception and development of innovative businesses in the UK. The strong focus of the UK to ‘build back better’ from the Covid-19 pandemic also aligns well with the increasingly ambitious ESG agendas of Sovereign Wealth Funds. Sovereign Wealth Funds can, (and I expect will), be a force for positive change in the coming years.”
The UK’s openness to foreign business, deep pool of expertise and experience, transparent legal system, and safe and stable regulatory environment have contributed to the country’s position as one of the world’s leading fund-management centres, and this includes SWFs.
The UK is one of the largest and most open markets in the world for fund management, with London, in particular, an important centre for SWFs as a clearing house and a location from which funds are managed. Cities such as Aberdeen, Birmingham, Cardiff, Edinburgh, Glasgow, Liverpool and Manchester are also important fund management centres. SWFs with offices in the UK include Norway Government Pension Fund Global, Kuwait Investment Authority and GIC Private Limited.
TheCityUK calculates that globally, SWF assets under management increased by an average of 8% annually from 2010 to 2019, before falling by 21% to $6.4trn in 2020, driven by the backdrop of the pandemic and a sharp decline in commodity prices. TheCityUK also estimates that there was a further $7.9trn in assets held in other sovereign investment vehicles in 2020, such as pension reserve funds and development funds.
The growth in the number of SWFs and in the value of the assists they manage reflects the rising importance of emerging markets. Six of the ten largest SWFs in the world are from emerging markets. The largest SWFs include the Norway Government Pension Fund Global, China Investment Corporation, Hong Kong Monetary Authority Investment Portfolio, Abu Dhabi Investment Authority, and Kuwait Investment Authority.
Examples of recent SWF investment into the UK:
The UK is a world leader in attracting foreign direct investment, with a reputation for being open and welcoming to global investors. SWFs can play a positive role–alongside other long-term investors such as insurers and pension funds, in investing the UK economic growth. Here are some recent examples:
- In March 2021, Mubadala Investment Company agreed to co-invest alongside the UK’s newly-established Office for Investment in UK health, technology, clean energy and infrastructure. The life sciences sector will receive £800m from Mubadala Investment Company, and another £200m from a UK government fund, the Life Sciences Investment Programme, over the next five years.
- In November 2020, Xeraya Capital, a venture capital and private equity company that was founded by the Malaysian SWF, Khazanah Nasional Berhad, invested $50m in a UK-based digital health firm, Congenica.
- In June 2020, Coatue, a global technology-focused investment company, together with GIC (Singapore’s SWF) and other investors such as Insight Partners, DST Global, Blossom Capital and Endeavor Catalyst, invested $150m in a UK-based online payments platform, Checkout.com.
- In 2019, Abu Dhabi Future Energy Company (Masdar), a subsidiary of Mubadala Investment Company, the UAE’s SWF, provided the first £35m (matched by the UK government to take the initial funding to £70m) to the Charging Infrastructure Investment Fund established by the UK government to fund the roll-out of charging stations for electric vehicles.