Falling stock and bond markets last year saw the assets of sovereign wealth funds and public pension funds fall by more than US$2 trillion ($2.9 trillion) to US$31.4 trillion, according to the latest report by New York-based industry analyst Global SWF.

The report said 2022 was the first year ever that the assets of sovereign wealth funds dropped − estimating that their assets were down by almost 10 per cent or US$1 trillion to US$10.6 trillion over the year. Public pension funds fell by US$1.3 trillion to US$21 trillion.

“The major challenge of 2022 was the simultaneous and significant correction of bonds and stocks of more than ten per cent, which had not happened in 50 years,” it said.

“This was not a US-isolated event but was seen worldwide.”

But 2022 also saw the return of the mega deal, with some 60 deals around the world done by these major investors, mainly the sovereign wealth funds, worth more than US$1 billion each.

Rates, war and crypto collapse hit values

The report, which covers more than 400 sovereign wealth funds and public pension funds, cites rising interest rates, the end of bull markets, the war in the Ukraine and the bursting of the crypto currency frenzy as forces behind a much volatile environment for these big investors.

Of all the major indices, only the FTSE100 managed to close the year in the black with other major markets down, while global benchmarks for private markets also down significantly.

The report said infrastructure and private credit have become “the most popular refuge” for these investors in the current volatile market with hedge funds managing to avoid huge losses and “gaining some momentum” as an asset class among sovereign investors.

The report noted the estimated falls are paper losses with most funds not realising them because of their capacity as long-term investors, but it says that the fall in assets is still “quite telling of the moment we are living in”.

Australia’s Future Fund, the 17th largest sovereign wealth fund in the world according to the report, announced that its total assets fell from $199 billion as of 30 September 2021, to $192 billion in 30 September 2022, the latest available figure.

Its chief executive, Raphael Arndt recently warned the outlook for investors has permanently changed with the old idea of 60 per cent stocks and 40 per cent bonds as well as “set and forget” investing no longer workable.

SWFs lead mega deals

The Global SWF report said 2022 saw the re-emergence of the mega deals − investments of more than US$1 billion − with average deals by sovereign wealth funds back up to levels not seen since 2016.

Despite their diminished assets, sovereign wealth funds invested more than US$152 billion in 427 transactions in 2022 – up by more than 38 per cent by value on deals in 2021.

Public pension fund deals were down by nine per cent to US$109 billion by value.

Singapore’s US$690 billion GIC continued to be the market leader, investing more than US$40 billion over 72 deals in 2022, up 17 per cent on 2021.

The two largest mega deals last year by sovereign wealth funds were by Singaporean SWFs − Temasek’s US$7 billion deal to buy Element Materials Technology from Bridgeport in January and GIC’s joint venture in a US$14 billion deal to buy US listed real estate investment trust, STORE Capital in September.

The report notes that the developed Asia-Pacific region, “especially Australia”, now attracts a fifth of all capital − or more than US$52 billion − invested by sovereign investors globally each year.

Last year also saw an increase in interest in investing in the aviation sector with the lifting of restrictions on lockdowns with deals including the privatisation of Sydney airport in March with which attracted US$5.2 billion from three Australian super funds – UniSuper, AustralianSuper and Australian Retirement Trust – as part of a US$16 billion takeover led by GIP and IFM.

In December, the Future Fund revealed it had bought a three per cent stake in the airport, a deal estimated by the market to be worth around $720 million.

Australian utilities score

The report said the biggest deal in the utilities sector took place in Australia in 2022 with the US$12 billion acquisition of AusNet by an array of Canadian and Australian funds, led by Brookfield Asset Management.

Renewable energy is another area of continued strong investment. The biggest deal in 2022 was done by Singapore’s GIC, the biggest single sovereign wealth investor in renewable energy in the world, when it bought Australia’s InterContinental Energy which has a portfolio of 200 GW of onshore wind and solar capacity.

The report noted that there had been an “uptick” in interest by sovereign wealth funds in investing in hedge funds.

“Given the simultaneous fall of both stocks and bonds, asset owners are seeking diversification and uncorrelated strategies in hedge funds,” it says.

It estimates that sovereign wealth funds and public pension funds now have US$500 billion invested in hedge funds, making up 25 per cent of the assets of the global hedge fund sector.

Outlook worrying

The report describes the prospects for 2023 as “ worrying with the prospect of new recession and a delayed bounce-back in markets”.

It says geopolitical events may have a huge impact on global economy and finance with the continued war in Ukraine, and potential strains between Taiwan and China.

It expects to see another busy year for deals by sovereign investors with the Asian region expected to attract continued interest.

But warned that some funds, such as Singapore’s Temasek and Canada’s CDPQ and the Ontario Teachers’ Pension Plan, have suffered reputational damage as a result of their investment in the cryptocurrency sector.

“We would expect sovereign investors to be extra-cautious with new or riskier strategies in the year ahead,” it said.

“This includes venture capital, which could stay low-key for another year.”


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