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Citi Perspectives for the Public Sector |
2014
25
Asset Allocation
Most SWFs have a mix of public fixed income
and equity portfolios, whereas roughly half of
them also have allocations to private equity,
real estate and infrastructure. In recent years,
we have seen an increasing allocation to
alternatives, including entry into the hedge fund
space by a limited number of SWFs. SWFs have
also continued to increase their exposure to
the faster growing Emerging Markets. Despite
some of the recent pullback in these markets, we
anticipate a longer-term trend for SWFs to invest
in these markets as they continue to develop.
Perhaps the area of greatest investment activity
in the past two years has been in infrastructure
and real estate. This trend has been driven
in part by the inherent volatility of the public
markets, as well as a need for predictable
returns. Increasing concerns of potential global
inflation, on the heels of significant monetary
easing by the Central Banks, has also increased
focus on owning real assets as a hedge. Not only
have we seen large amounts of capital deployed
in these sectors, we have also seen an appetite
for undertaking development risk (albeit with
strong sponsors) in the real estate sector.
Moreover, whereas the Canadian pension funds,
superannuation funds in Australia/New Zealand,
GIC Private Ltd., ADIA and CIC had previously
established teams focused on infrastructure
investing, we have recently seen the likes
of Kuwait Investment Authority and Qatar
Investment Authority establish new initiatives in
this area. We are now beginning to see the entry
of Japanese pension funds in this space.
A point of differentiation among the various
infrastructure investors is whether they are in
a position to lead a transaction. Only a limited
number of players have historically played this
role. In addition, a number of the infrastructure
private equity firms have also provided this
capability. We are seeing an increasing trend
of partnerships among the various SWFs and
pension funds through the establishment of
consortia for bidding. This has allowed a lot of
the newer entrants in the space to deploy large
sums of capital without having to build larger
staffs to undertake direct investment activities.
We are noticing this trend more broadly in
private equity investing as well.
Closing
With local presence in over 100 countries, Citi
has partnered, across a range of Corporate and
Investment Banking, Markets and Transaction
Services products and solutions, with most of
the SWFs from their inception. Given the trend
that SWFs and, more broadly, government
investment funds, will continue to become
increasingly important participants in the global
investment landscape, Citi has taken a lead
in building a globally coordinated coverage
effort for this group of clients. This initiative
allows us to not only serve these clients more
efficiently, but also to help share best practices
in their evolving organizational structures and
investment strategies.
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Perhaps the area of greatest
investment activity in the
past two years has been in
infrastructure and real estate.
This trend has been driven in
part by the inherent volatility of
the public markets, as well as a
need for predictable returns.