Sovereign funds

$15 trillion, or 20% to 25% of assets under management worldwide, will be concentrated in the hands of 140 sovereign funds by 2020.

Sovereign funds are the key players of the financial world. According to projections, 140 sovereign funds are expected to control 15% of the total assets under management worldwide, or $15 trillion, by 2020.

In 2016, they represented about 6 times France’s GDP. They have the financial power to exert a decisive influence on global markets, which raises the following questions:

  • What are their characteristics?
  • How do they differ from other financial players?

Sovereign investors are investment funds operating in the governmental sphere and dealing on the financial markets.

They professionally manage the funds entrusted to them by their respective governments, in accordance with the specific objectives defined by their sovereign trusteeship.

Their long-term view, their missions and the size of their assets under management make them major sources of capital for investments in sectors of the economy such as infrastructure, SMEs/MSBs and new technologies.

CDC IC has entered into a partnership with the Global Project Center of Stanford University in the United States, to produce a series of reference notes highlighting the characteristics of these long-term investors.

Sovereign investors: understanding the giants of the financial world
Sovereign wealth funds and private equity

Description

Sovereign Investors are the giants of the financial world. 15% of total global assets under managementi, US $15 trillion, are projected to be in the hands of about 140 sovereign funds in 2020ii.

This is equivalent to about 6 times the GDP of France in 2016. It is also slightly more than the GDP of the USA, the first economy in the world in 2010iii.

Sovereign investors are also quickly growing in size and numbers. However, their identity as a new category of investors is still forming, prompting research on their characteristics.

In the following paper, we use the results of extensive existing research to describe key characteristics of sovereign investors.

Through the study of their objectives, size, investment strategies and governance challenges, we parse out the commonalities and differences between funds that are part of this new category of investors.

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Historically, sovereign wealth funds (SWFs) have held portfolios primarily made of public equities and debt. However, in the last ten years, they have diversified to increasingly include alternatives and notably private equity. 61% of SWFs now hold some private equity in their portfolios. Together, SWFs held 17% of all global assets in private equity in 2016, compared to 9% in 2013.

Reasons for this growing interest include the relatively low returns from traded stocks and sovereign debt, and the growing sophistication of some funds, now creating special accounts with private managers, or even bypassing them and sourcing their own deals.

Many large funds are also using private equity to both diversify their portfolios and develop their domestic countries. The trend is indeed toward an increase in bilateral deals where investments support the development of targeted industries in both participating countries.

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