Dubai: Countries in the Middle East are increasingly looking at investing state-owned pool of money in private equity, according to the fourth annual Invesco Middle East Asset Management Study.
Invesco’s analysis showed that average private equity allocations for “investment” sovereign wealth funds (SWFs) have gradually increased from five per cent in 2011 to 13 per cent in this year’s study. The increase was driven by the diversification needs as well as higher return objectives, with co-investment models being the preference.
Among ‘development’ SWFs a third (33 per cent) of new assets were on average allocated to private equity in the last 12 months, a huge jump compared to 10 per cent in 2012. The study suggests that the majority of investment is via direct operations.
“Our analysis of total and new SWF asset placements in our study suggests that private equity is a key theme not just for development SWFs but also for investment SWFs,” Invesco said in its report.
The study also found that as the oil price recovers, ‘development’ SWFs in the region are seeking higher returns of 14 per cent and allocating more assets locally.
In contrast to ‘development’ SWFs, ‘investment’ SWFs on average target a return of 8 per cent and are future generation funds that seek growth via a diversified portfolio. This explains the lower weighting to private equity and broader spread of investments across various asset classes, for example, the largest allocations within these SWFs are to global equity (39 per cent), followed by global bonds (16 per cent). Diversification is the key driver behind investing in private equity.
The study found the increase in allocation to private equity this year reflects a greater need to diversify away from public equities and achieve higher returns.
