I am delighted to present you our second Annual Report, launched on January 1 with absolutely no reporting delay. At Global SWF, our mission is to lead the research and analysis of the activities of the world’s major State-Owned Investors, by producing timely and insightful data and by staying relevant and independent. And we are uniquely positioned to do so, after providing services on the ground for many years and by nurturing a close relationship with all the important players.
Covering sovereign investors is both fascinating and challenging. On the one hand, they are intrinsically linked to their hosting economies and finances and there are usually more issues at stake than just pursuing superior returns. On the other hand, because of their global and heterogeneous nature, everything that goes on in the world, from geopolitics and pandemics, to climate change and technological disruption, unequivocally affects them. The industry is always evolving and can change significantly in a single year.
2021 was no exception. The world failed to get “back to normal” despite getting 4.5 billion people vaccinated against Covid-19 and entered a situation of great uncertainty that affected economies in different manner. Global GDP may have grown a 5.9%, but there is a general sense of discontent and insecurity among the population. COP26 highlighted the urgency of stopping global warming and of tackling resource scarcity. Other key concerns throughout the year included growing poverty, inequality, geopolitical tensions, rising energy prices, supply chain disruption, and inflation rates we had not seen in the West in three decades.
In that context, Sovereign Wealth Funds and Public Pension Funds continue to operate cautiously. The heterogeneity of the industry was magnified by the pandemic as some funds were asked for capital and / or for domestic bailouts, while others pursued opportunities overseas and greatly benefited from the stock rally. The line between asset owners and asset managers is becoming blurrier, with rising collaboration among them. SOIs are also looking at asset classes, regions, and industries in very different manner now. We argue that the pandemic has indeed marked a new phase, which we call State-Owned Investors 3.0.
At Global SWF, we were very busy and worked extremely hard to stay on top of it all. We have written 250 proprietary and original articles that were posted publicly on our website every weekday of the year, for anyone to read. Every first day of the month, we also distributed insightful newsletters to our clients, including interviews with the funds’ C-suite, and we released the first-ever mobile app to track SOIs’ daily activities. And all this has not gone unnoticed: our Data Platform is now trusted by a few dozen global clients including several SWFs; we have over 4,000 active followers in our social media channels; and we have been mentioned more than 200 times by the international media, including FT, WSJ, Reuters, Bloomberg, and Forbes.
We did much more than feeding our Data Platform and collaborating with media partners, though. We submitted formal academic articles to the Annual Review of Financial Economics and to the Journal of International Business Studies, delivered presentations at the UK Parliament in London and at the OECD in Paris among others, and completed several projects. I am particularly proud that we helped Framtiden and Fossielvrij identify the opportunity cost of not investing in green stocks for GPFG and ABP. After publishing our findings, the latter committed to divesting US$ 17 billion in fossil fuels by the first quarter of 2023.
I would like to take the opportunity to thank all team members – in particular, Daniel Brett – who have worked tirelessly to meet commitments and deadlines, as well as our esteemed advisory council, which has proven to be an effective sounding board to keep us on track. Also, our work would have not been possible without the excellent doing of our three partner-firms, Appoly, Odyssey, and Vizualytiks. We firmly believe in the global aspect of our business and have now team members, advisors and partners in all continents.
Please enjoy our annual report and we look forward to continuing our dialogue in the year ahead.
2021 was yet another formidable year for state-owned investors. Global stock markets, especially US stock markets have not stopped going up since March 16, 2020. In the 21 months to the end of 2021, the S&P500 has more than doubled, the Dow Jones Industrial Average grew 90%, and the S&P 1,200 Global Index was up 86%. And, for better or for worse, sovereign wealth funds and public pension funds still have a very significant exposure to American stocks – which has allowed most to score their best ever results, and to boost their AuM.
The size of the SWF industry increased a 6% year-on-year in 2021 and exceeded the US$ 10 trillion mark for the first time in history. This was not only helped by the price of equities, but also by the recovery of oil prices, and to a lesser extent by new funds established during the year. Public pension funds also accomplished a historical milestone after growing past the US$ 20 trillion and experienced a higher y-o-y growth of 8.7% due to increased exposure to US stocks, and to rising contributions from pensioners around the world.
There was a big disparity between the performance of the different asset classes during 2021. Fixed Income was the only asset class with negative returns, as measured by the S&P 500 Bond global index. Public equities continued to display a strong performance, according to the S&P Global 1,200 index. Hedge funds disappointed again with returns significantly below stocks. Private markets are always more difficult to track as SOIs do not necessarily carry out valuations every quarter, and if they do, they have certain lag. Yet, according to indices of listed companies, real estate was best performing asset class of 2021, followed closely by PE.
In 2021, state-owned investors deployed more capital than in any of the previous six years – both in terms of number of deals and in terms of deal value, which was over US$ 219 billion. Compared to 2020, SWFs deployed 19% more, with US$ 106.1 billion in 500 transactions; while investments by PPFs increased significantly in terms of both value and volume, up to US$ 112.9 billion in 354 deals.
GIC was again miles ahead of everyone else. The Singaporean SWF deployed US$ 34.5 billion in 110 deals, almost double of what it did in 2020. Almost half of that capital was invested in real estate, with a clear bias to logistics. The next biggest spender was CPP with US$ 23.7 billion, of which 61% was invested in real assets. Interestingly, both funds present a strong preference for North American assets and a smaller than average appetite for Emerging Markets. Other Top 10 funds including ADIA and Mubadala think differently.
Emerging markets only attracted 22% of the capital this year, one of the lowest figures in six years, to the benefit of Developed Asia-Pacific. Another key trend during the period 2016-2021 was the change in SOIs’ sectorial preferences. In 2016, over half of the deals were in the real assets. Today, that figure has decreased to a third of the total. The industries that have gained importance are, not surprisingly, healthcare, retail and consumer, and technology. All three sectors are touched by the magic wand of Venture Capital.
But not everything was private markets. Sovereign funds are now very active in stock markets around the world, and some have started diversifying away from the US markets. After the shopping spree of March 2020, PIF changed its strategy and consolidated its position by holding mainly ETFs and technology stocks – including a 63% stake in Lucid Motors, which tripled its holdings when it went public in October 2021. CPP demonstrated a strong interest in US equities, increasing its portfolio to US$ 88.3 billion (21% of its AuM).
China and India are providing an alternative to diversify public holdings. Most SOIs proved to be bullish on Chinese stocks, especially ADIA, which shut down its Japanese program to focus on China, and PIF, which recently applied for QFII status. Indian stocks on the other hand were dominated by GIC, with US$ 14.8 billion in holdings. This is in stark contrast with CDPQ, which sold most of its Indian positions.
SOIs were also active sellers in 2021 and divested US$ 32.1 billion in 45 transactions, half of which involved properties and infrastructure assets. Mubadala was very active with two IPOs and the sales of Aldar, Cologix, MATSA and Oil Search; CPP scored the largest monetization of the year when it sold 45% in GlobalLogic to Hitachi; PIF raised US$ 3.2 bn from the sale of 6% in STC; and ADIA exited Scotia Gas and various properties in Australia and China. Over the past six years, SOIs have monetized over US$ 285 billion.
Besides growth in assets and deal activity, one of the key trends we are witnessing is the change in investment strategy, and whether it makes sense for SOIs to stick to the traditional view of strategic asset allocation or to adopt a more streamlined and dynamic approach to portfolio construction. We discuss this in detail in Section 4 from a technical point of view, demonstrating that those funds that adopt Total Portfolio Management usually have better financial returns, suggesting that more funds may implement this approach.
We carefully evaluated performance and deal-making to consider which state-owned investor should be recognized as “2021 Fund of the Year”. There were funds that displayed high levels of deal activity; there were others that played a crucial role at home during the economic recovery; and there were others pursuing agreements with governments around the world. Only one SOIs combined all three factors and was therefore a worthy recipient of the award: Mubadala Investment Company. We are fascinated by the role the fund is playing in Abu Dhabi and abroad and were very happy to offer the prize to its Chief Strategy & Risk Officer.
The “Asset Class of the Year” was obvious this year, as Venture Capital absolutely boomed. Not only did VC investments by SOIs surged by 81% to a record US$ 18.2 billion in 328 deals, but VC also contributed to the globalization of their portfolios. Only 120 of these investments went to Silicon Valley, with the rest being distributed across 32 countries. SOIs switched preference to late rounds including pre-IPOs, which signals the entry of newer and more risk-averse investors. Temasek, CPP, GIC and Mubadala continue in the Top 5 league table and are joined this year by QIA, which is showing more activity in VC than in any other department.
The prevalence of big opportunities and increasing interest in its real assets, as well as the consolidation of its superannuation schemes, made us go with Australia for the “Region of the Year”. There is a fine line between inbound capital and outbound players as demonstrated by the privatization of WestConnex, with its proceeds going to feed the local SWF, the NGF. Canadian pension funds continue to lead foreign direct investments Down Under and have maintained offices in Sydney for several years. They will be joined by GIC in early 2022, which could also drive a fresh interest in the Australian start-up ecosystem.
Healthcare as a sector has been building momentum since the start of the pandemic in 2020, and it was a fair choice for the “Industry of the Year”. SOIs have backed some of the most known vaccine manufacturers and reaped some healthy rewards, especially ADIA in Moderna and Temasek in BioNTech. RDIF continues to drive the efforts to distribute Russian vaccine all around the world, which changed the whole dynamic of strategic funds. They were followed by other players including CPP, GIC and OMERS. However, the largest deals were seen in pharma (Acino, Amoun), devices (Medline, IVC) and services (Biomat, Healthcare Activos).
We are extremely happy to report that SOIs have, for the first time, invested more capital in renewable energy, than in oil and gas. This milestone was a few years in the making and has concluded a trend that has been driven by social pressure and financial returns and accelerated by the Covid-19 pandemic. State-owned investors spent US$ 22.7 billion in 37 “green investments”, including stakes in brownfield assets, investments in greenfield assets, shares in listed companies, and commitments to new climate-focused funds. We also continue to track the commitments around net-zero portfolios, which we expect to ramp up in 2022.
The document also explores organizational matters, including the establishment of new funds – and the depletion of others; the opening of new offices overseas – and the closure of others; and the appointment of new CEOs – and the dismissal of others. We saw a few leaders being removed overnight during 2021, including TWF’s Zafer Sönmez and Alaska PFC’s Angela Rodell. We interviewed them both, highly respect what they were doing in their respective funds and could not be more disappointed with the outcome. There were 18 other CEO appointments in 2021, which represents a high level of disruption and churn rate at the top.
Finally, we offer a revised our set of projections for State-Owned Investors 2030, which we started last year. It is never easy to predict 10 years down the road for an ever-changing industry like this, but we expect global AuM to reach US$ 53.6 trillion by the end of the decade. This could increase further if territories like Germany, Switzerland, Japan and Taiwan finally decide to join the “SWF Club”. In any case, we expect most funds to be underway towards their net zero goals by 2030 – and we look forward to telling you all about it.
Year 2021 demonstrated that the industry has entered a new phase, which we call State-Owned Investors 3.0. This follows a first period until 2008 with largely scattered and independent pools of capital (“SOIs 1.0”) and a second stage from the global financial crisis to Covid-19 that boosted AuM and investments (“SOIs 2.0”). The rising appetite for venture capital and the changes in preferences around real assets, means that deal volume has rocketed but the change in aggregate deal values is not as noticeable. In the past 12 months, both sub-segments of SOIs have been extremely busy with a behavior that has evolved significantly from prior years:
SWFs have been especially active this year with 500 different investments, more than in any previous year. Yet, the level of investment is not yet at 2016-2017 levels. Those two years are inflated by the US$ 60 billion raised by Softbank from PIF and Mubadala, but 2021 does not beat 2016 even if we isolate that effect. The average ticket deployed by SWFs has decreased from US$ 522 million in 2016 to US$ 212 million in 2021.
PPFs had their best year yet, in terms both volume and value, which exceeded US$ 110 billion for the first time. Canadian funds are directly responsible for two thirds of that value. CPP alone invested almost US$ 24 billion in 76 transactions, several of them as a co-investor with GIC and other SWFs. The average ticket deployed by PPFs is much more stable, around US$ 320-430 million over the period under review.
Some of the largest transactions of the year were co-investments between SWFs and PPFs. ADQ and Samruk Kazyna committed US$ 6 billion to build power (mostly green) assets in Kazakhstan. ADIA, AustralianSuper and CDPQ doubled-down their bet on WestConnex in Australia with a US$ 4 billion combined value. ADIA, APG and CDPQ invested with INA with US$ 3.8 billion to be invested in Indonesian infrastructure. And GIC spent US$ 9.1 billion in logistics properties in three different deals in the US, Europe and Australia.
The largest tickets outside of real assets were GIC’s acquisition of 30% of Czech telecom CETIN a.s. for an estimated US$ 2.3 billion; ADIA and GIC combined investment in American healthcare provider Medline, which we believe was in the tune of US$ 2.0 billion; and CPP and AIMCo joint injection of US$ 1.9 billion into Australian telecom group BAI Communications, which the group used buy Mobilitie in the US. Of course, the real boom in terms of number of deals happened in Venture Capital – but more on that on pages 26-29.
The 2021 league table is led, once again, by GIC. The Singaporean SWF completed 110 deals for US$ 34.5 billion, 95% more than it did in 2020. Almost half of that capital was invested in real estate, with a clear bias to logistics. This was followed by infrastructure and energy, with a 15%, and by financials, healthcare, technology, and retail, evenly distributed with 9% of the total each. Only 8% of the overall value was in VC.
Following GIC, although well behind, was CPP, with US$ 23.7 billion. The Canadian pension fund also had a clear preference for real assets, which took 62% of the capital it invested. A quarter of the deals involved technological companies, in line with the Venture Capital activities. In the past six years, CPP and GIC have invested a combined US$ 233 billion, and in 2021 alone, they co-invested in 10 deals* around the world.
After the Singaporean and Canadian funds, we find no other than the Fund of the Year, Mubadala, which has proven to be the most active Middle Eastern investor, well ahead of its stablemates ADIA and ADQ. The once-omnipresent QIA and China’s CIC have changed their profile and missed the Top 10 since 2016-17. Dutch investor APG is coming back with renewed strength, after investing over US$ 13.5 billion in 2021 alone.
In any case, let us have a deep look at the two leaders, which are more similar than one may think:
Interestingly, the Top 10 funds present very different geographical preferences. The two leaders, GIC and CPP, present a similar regional profile, with a strong weight in North America and Europe (69% and 67% respectively), and just a 15%-13% in Emerging Markets. Temasek thinks similarly, although with less weight in Europe (10%) and more in Emerging Markets (29%), while the three Abu Dhabi funds have a clear appetite for emerging markets, including not only the UAE but also Brazil, Russia, India, and China.
The overall balance between regions for 2021 was 78% for developed markets and 22% for emerging markets, which is one of the lowest figures in the past six years. The big winner of such rebalance has been Developed Asia-Pacific (especially, Australia), which now attracts a sixth of all capital invested by SOIs globally.
We can run a similar analysis in terms of industries, and how SOIs have changed their sectoral preferences over the past six years. In this case, we analyze deal volume, as opposed to deal value, to avoid skewing the sample towards real assets, which normally involve much larger tickets.
The results of the exercise are astonishing. In 2016, over half of the deals (51%) pursued by SOIs were in the real estate and infrastructure space. Today, that figure has decreased to a third of the total (33%). The industries that have gained importance are, not surprisingly, healthcare, retail and consumer, and technology. All three sectors are touched by the magic wand of VC and are therefore increasingly present in SOIs’ minds.
Sovereign funds are very heterogeneous when it comes to investing in stock markets. Some of them have very capable and active teams in-house; some others use external managers, index investing or special purpose vehicles and stick to holdings below the disclosure thresholds – which makes them very difficult to be tracked; some others seek short-term gains; and several of them have started diversifying away from the US markets.
Let’s take Saudi’s PIF, which made the news at the onset of the pandemic for investing US$ 7.7 billion in 23 stocks in energy, entertainment, and financial services. PIF’s shopping spree was not typical of a SWF in the sense that it sought short-term gains, and 20 of those positions were divested from within a year. Since then, it has followed a very different strategy by holding mainly ETFs and technology stocks – including a 63% in Lucid Motors, which tripled the Saudi fund’s holdings in US listed equities when it went public in October 2021.
Other SOIs were more conservative. NBIM, which is one of the largest investors in US equities, saw its holdings increase a 5% from Dec-19 to US$ 376 billion today; KIC reaped the benefits of the stock rally but did not make significant changes; and neither did Temasek except for a 4% in Blackrock Inc., which is now worth US$ 4.6 billion and boosted its US holdings. Unfortunately, other leading SWFs including ADIA, GIC, KIA and QIA use external vehicles and invest below the disclosure thresholds, so we have been unable to track them.
Pension funds do not usually make as many headlines but are also significant investors in US stocks. In 2020-2021, APG slightly decreased its holdings to US$ 72.6 billion, CDPQ increased them to US$ 47.0 billion, and CPP boosted its portfolio by a 73%, holding today US$ 88.3 billion (21% of its AuM) in US listed equities.
In addition, sovereign investors have started looking at other equity markets such as those of China and India. Despite the geopolitical tensions and regulatory concerns, most SOIs are bullish on Chinese stocks – except for Singapore’s GIC, which has reduced its portfolio since the pandemic started. In 2020, ADIA shut down its Japanese equity program and has since then increased its weight in Chinese equity markets.
SOIs need a Qualified Foreign Institutional Investor (QFII) license to invest in RMB-denominated A Shares and more recently, to participate in financial derivatives, commodity futures, and stock index options. In November 2021, PIF applied to become a QFII, aiming at some activity in Chinese stocks in early 2022.
Lastly, we have seen a very different behavior when it comes to Indian stocks. GIC is miles ahead of the pack, with holdings worth US$ 14.8 billion, although it did not change them during the pandemic. NBIM and KIA increased their positions significantly, while CDPQ seems to have scratched its Indian equities altogether.
US equities will certainly stay an important part of SOIs’ portfolios, but we expect them to ramp up their holdings in growth markets, as they seek higher returns, liquidity, hedging, and above all, diversification.
Long gone are the days when SOIs invested year after year and held to the assets forever. Institutional investors are now mature and sophisticated, and able to cash out their position when they deem it beneficial. Temasek divested more than invested in two of the past five years and has cashed US$ 208 billion since 2004.
The trend is even more noticeable in its Middle Eastern peer, Mubadala. The Abu Dhabi investor inherited from IPIC several assets that were not considered strategic and has monetized US$ 60.8 billion in the past three years alone, via private placements (e.g., EMI Music, CEPSA, Borealis) or, more recently, via IPOs.
Global SWF has tracked divestments totaling US$ 285 billion in the past six years. The most significant was PIF’s “sale” of SABIC to Aramco for US$ 69.1 billion in June of 2020. But SOIs were also big sellers in 2021. Mubadala was again very active with two IPOs and the sales of Aldar Properties, Cologix, MATSA and Oil Search. In most cases, the Gulf investor decided to pursue partial sales and to stay with some skin in the game.
Other active sellers in 2021 included CPP, which scored the year’s largest monetization when it sold 45% in GlobalLogic to Hitachi; OTPP, which stayed active in the PE market; PIF, which raised US$ 3.2 bn from the sale of 6% in STC; and ADIA, which exited Scotia Gas and properties in Australia and China. In total, we saw US$ 32.1 billion generated in 45 divestments, half of which involved properties and infrastructure assets.
If 2020 was a quarantined year and 2021 was a hybrid year, what will 2022 be? What will the “new normal” look like? By now, it seems clear that the “future of work” may have changed forever and that Zoom calls – or a more metaverse-like version of them – are here to stay. But what about the “future of investing”?
In 2022, sovereign investors will pay, as it is customary, a lot of attention to national elections. And these will happen in Asia-Pacific (South Korea, Philippines, Australia) in Q1-Q2; in Africa (Kenya, Angola) in Q3; and in Latin America (Brazil) in Q4. These are all-important to our industry from both an inbound and an outbound perspective. In addition, there will be interest in the new dynamics of Europe, with the absence of Chancellor Merkel, and the Presidency of the EU rotating to France, which will also have elections in April. In November, there will be some heat in the US with the mid-terms and potential candidacy of Trump 2024.
In addition, investors will continue watching the dynamics within China, especially around the crackdown of President Xi on Chinese tech firms, which is expected to continue. Games and shopping may lose momentum against geostrategic investment, and that may affect the overall Chinese Venture Capital market. Investors like Temasek seem to be “too deep” in China to seek an exit, but others may continue to seek alternatives in India, Southeast Asia, or other untapped markets beyond the continent.
Crypto may have boomed elsewhere, but it continues to generate very little excitement in the SWF / PPF world. If Central Banks decide to launch their own, centralized, digital currencies, we may start to see some significant moves especially from stabilization and savings funds exposed to the domestic public coffers. Others may approach it as a subset of the increasingly important allocation to venture capital.
Over 2020 and 2021, the disconnect between Wall Street and Main Street was evident, and investors will be more concerned about the end of the bull market. But the economy is also important, and there are reasons to be worried: global GDP is expected to grow at 4.9% but this could prove over-optimistic if the supply chain disruption, energy prices and labor issues are sustained. The price of crude at end-2021 was around US$ 75, up from US$ 50 a year ago, and that jump is a game-changer for many economies.
Of course, that is good news for Middle Eastern SWFs especially, which may enjoy a break from plugging public deficits. Oman is still expecting some deficit that will be partly covered by the OIA, but Saudi Arabia is hoping to run on surplus for the first time in eight years. In that context we expect not only PIF to become more prominent, but other institutions like NDF and GOSI to take a leading role, as well.
The Middle East and North Africa is set to be subject of international attention. The WBG-IMF biannual meeting overseas will be finally held in Marrakesh in October, and the new UN session on climate change (COP27), in Sharm el-Sheikh in November. Just 500km South across the border between Umluj and Al Wajh, PIF will be finalizing phase 1 of development of the Red Sea Project, one of its multi-billion, giga-projects.
We also expect sports to keep playing an important part in SOIs’ actions. Beside any political controversy, the Winter Olympics to be held in Beijing in February may bring some investment opportunities. And perhaps more relevant, Qatar will hold the FIFA World Cup for which it has been preparing for 12 years. Gulf funds have invested in PSG and Malaga CF (Qatar), Newcastle and Sheffield UFC (Saudi), Manchester City (Abu Dhabi) and Paris FC (Bahrain). At the time of writing this report, PIF showed interest in Italy’s Inter Milan and France’s OM, among others. We would not be surprised if we see more clubs acquired or sponsorship deals struck (like CVC in La Liga) by Gulf SWFs in the next 11 months before the festivities start in Doha.
The other area that may finally awaken significant interest from state-owned investors is the space race, given the expected boom in space tourism in 2022. In February 2021, the UAE Space Agency beat the Chinese and American rockets and entered Mars’ orbit successfully, and Mubadala is already heavily invested in the Fourth Industrial Revolution (4IR). Elon Musk’s Space X is today the world’s second largest unicorn (just after Bytedance) with a US$ 100 billion valuation, and other SOIs may want to follow OTPP as investors.
Regardless of the potential transition of Covid-19 into an annual virus / booster, we believe healthcare will continue to be an important part of sovereign investors’ portfolios and activities. Coupled with technology and consumer, healthcare will continue pushing the bet for Venture Capital and start-ups. Every SOI should aspire to replicate the success of PIF with Lucid Motors (40x RoI) even if 90% of startups are doomed to fail.
Lastly, we look forward to seeing new SWFs being formed in Israel, Namibia, Ethiopia, Mozambique and even Germany; and to merged pension schemes arising in the Middle East and Australia. We are also hoping for some of the depleted Latin American stabilization funds to start receiving capital again as oil revenues accumulate. Finally, we can’t wait to see new offices blossoming from New York (BCI) to London (PIF), and from Singapore (HOOPP) to Sydney (GIC). SOIs will keep creating employment everywhere they go.
One thing is certain: the industry will continue to be fascinating in 2022, and we will keep covering it for you.
There is no doubt that state-owned investors have gained maturity and sophistication in the past few years. They have also been growing their internal teams, including strategists, economists, and allocation specialists. Many of them are starting to disagree with the traditional approach to strategic asset allocation, i.e., splitting the capital into the most commonly adopted categories, namely fixed income and treasuries (“FIT”), public equities (“Eq”), real estate (“RE”), infrastructure (“Infra”), private equity (“PE”), and hedge funds (“HF”).
Such mix of asset classes has changed significantly in the past few years. Sovereign wealth funds have increased the part of the pie invested outside of stocks and bonds from 15% in 2008, to 23% in 2016 and 25% in 2021. Similarly, public pension funds have increased the allocation to alternatives from 11% in 2008, to 15% in 2016 and 19% in 2021. Considering the growth in assets these vehicles have experienced in the past few years, we are talking about a tremendous amount of new capital in real assets, private equity, and hedge funds.
Most likely, the trend will not stop here. After interviewing the C-suite of the SOIs throughout the year (link), one message has come across loud and clear: asset owners are looking at increasing further their allocation to private markets. For example, Canada’s CDPQ increased its allocation from 27% in 2016 to 36% in 2021 and is targeting 45% by 2024; Abu Dhabi’s ADIA recently raised its allocation target bands for private equity and infrastructure, and Korea’s KIC is aiming to boost alternatives from 15% in 2021 to 27% by 2027.
Now, does it make sense to continue being rigid about this classification, forcing allocations, portfolios, and teams to operate independently? What happens to the management of private investments that are listed? Who looks at real assets that combine characteristics of both real estate and infrastructure? Should private credit be part of the fixed income allocation and teams, or come under private equity instead? How do you integrate ESG in your investment decision approach if you do not have a holistic view of your portfolio?
Many argue that it is absurd to keep calling alternatives anything that falls outside of bonds and stocks, given the new reality we operate in now with the blending of some of these categories. The solution takes different names – total portfolio management (TPM), total fund management (TFM), total portfolio approach (TPA) or thematic investing (TI) – but it all refers to the same idea: a more streamlined and dynamic approach to portfolio construction.
Such distinct methodology has been praised for creating a more agile response to market events, for being less dragged by benchmarks and for centering the decision making on risk factors. More importantly, internal teams do not find themselves fighting for capital or yearly allocations and can collaborate and invest together.
During 2021, we witnessed a few SOIs setting up new teams and hiring seasoned strategist. For example, OTPP created a new Global Investment Strategy group, and Future Fund hired its first Chief Economist, a position which we can find in a few other funds including ADIA, CDPQ, GIC, NZ Super, OMERS, and PPGM.
Yet only a handful of funds so far identify themselves with this line of thinking and have established separate teams or initiatives. The list of names won’t surprise anyone: five Canadian pension funds (BCI, CPP, OMERS, OTPP, PSP), three Oceanian funds (Future Fund, NZ Super, QSuper), Denmark’s ATP, and Singapore’s GIC.
We have run an analysis with these ten funds and looked at their average annual return over 2016-2021, revealing a superior return (9.6%) to those SWFs not following TPM (6.9%) and to those PPFs not following TPM (7.5%). Even if we remove the outlier, Denmark’s ATP, the TPM-driven funds still perform better (8.5%).
Obviously, the usual caveats apply to this kind of exercise, as funds report returns in very different ways – and some only report rolling returns, in which case we estimated their single-year returns. However, if the most sophisticated funds are looking at this issue and achieving superior returns (for this and other reasons), they may be followed by the rest of state-owned investors soon.
One cannot talk about the development of the United Arab Emirates without mentioning Mubadala (the Arabic word for exchange). Oil was first discovered in the Umm Shaif field in 1958, and since the unification of the Emirates, the UAE has made its mission to diversify the economy so that growth is self-sustaining once its oil runs out. The best way to achieve that ambition is through leading investment and development organizations.
Mubadala Development Company (MDC) was established in 2002 to drive diversification of the UAE economy while also delivering social returns to Abu Dhabi. In 2017, MDC merged with the International Petroleum Investment Company (IPIC) to establish Mubadala Investment Company (MIC), with the ambition of being a global investor, while continuing to support the development and diversification of the UAE economy.
A year later, the Abu Dhabi Investment Council (ADIC), joined the Mubadala group, doubling the value of its AuM with a globally diversified portfolio. Today, the combined entity has holdings across most industries in 50+ countries and is an important part of Abu Dhabi’s economic engine and Economic Vision 2030.
The SWF Capital of the World:
Abu Dhabi is one of the world’s most prominent cities when it comes to sovereign wealth management. Global SWF estimates that the Emirate manages today around US$ 1.3 trillion through four different SWFs: ADIA, Mubadala, ADQ and EIA, the federal fund. This makes it the third largest concentration, after Beijing and Oslo.
The first sovereign-related investor was an early version of ADIA (the Financial Investment Board) in 1967, after oil was discovered but before the UAE’s independence. Today, ADIA continues to manage budget surpluses – and contributes to covering deficits – and has grown to be the world’s third largest SWF. Its focus is to grow capital through a disciplined investment process.
Since 2007, ADIA does not invest domestically. That year, it was decided that its local portfolio of financial institutions would be spun off to form a new SWF, called ADIC, or the Council. With oil at US$ 100 / barrel, the new entity was receiving surpluses that could not be absorbed locally, so it also started investing overseas. In the same year, the EIA was formed to oversee a federal portfolio of key assets.
In 2014, the five SWFs (ADIA, MDC, IPIC, ADIC, EIA) were reaching a combined US$ 1 trillion AuM. However, Abu Dhabi’s leadership determined that there would be benefits from driving consolidation within its government-related entities, and by 2018, MDC, IPIC and ADIC had merged into the Mubadala group. The five SWFs had now become three: the stabilization / savings fund (ADIA), the strategic investor (Mubadala) and the federal vehicle (EIA). In the same year, certain state assets were transferred to a newly formed entity, ADQ.
Today, ADQ has grown significantly (US$ 110 billion according to Global SWF) including the creation of a separate subsidiary for start-ups, ADG. It is unclear how many funds Abu Dhabi will decide to operate in the future, but whatever that number may be, they will surely earn international interest and respect. And Mubadala will continue to be central to the government’s diversification and global integration efforts.
For its significant contribution to the development of Abu Dhabi and the UAE, for its leadership in pursuing global partnerships, for its unparalleled investment and divestment activity displayed throughout the year, and, in general, for its contribution to the advancement of the SWF industry, Global SWF believes that Mubadala Investment Company is a worthy recipient of the 2021 Fund of the Year award. We spoke with Ahmed Saeed Al Calily, its Chief Strategy & Risk Officer, about the fund’s performance and ambitions.
[GSWF] How has the fund’s strategy changed over the last 20 years and how will it continue to evolve?
[MIC] Mubadala’s journey has reflected the growth and evolution of Abu Dhabi itself: always forward-leaning, looking to future possibilities and how to leverage the strengths of today to create opportunities for generations to come. Mubadala arrived in its current form by complementing substantial organic growth with two significant mergers, while successfully evolving from a local development company into a globally recognized best-in-class investor.
Today, Mubadala is a global, unique, and responsible investor with an ambition to double its size over the next decade. Our organizational structure, strategy and global partnerships are meant to take advantage of a range of investments, particularly in sectors with significant “tailwinds”, including technology, life sciences, renewable energy and fintech to name a few. We will also seek opportunities in more traditional sectors.
Investing responsibly has always been central to Mubadala’s approach, focusing on both financial and social returns. With our evolution, we have continued to drive and institutionalize our approach to ESG principles and factors. Our dual focus of driving value-accretive diversified economic growth within the UAE, combined with deploying capital into global investments seeking positive economic trends and market dynamics, is well-grounded within our organization.
[GSWF] The investment landscape of Abu Dhabi has changed dramatically in the past five years with the merger of some funds and the emergence of others. How does this align with the Economic Vision 2030?
[MIC] Mubadala’s mandate has always been to create sustainable financial returns for our shareholder. Following the inauguration of MIC in 2017, ADIC joined the group in 2018. This is an acknowledgment of our Leadership’s belief in the strength that comes from collaboration and from integrating diverse perspectives and backgrounds.
As a responsible investor, we are committed to supporting the economic diversification of Abu Dhabi while leaving a positive lasting impact on the communities where we invest worldwide. As we progress with our activities and ambitions, we will continue to align ourselves with the Economic Vision 2030 including supporting a large empowered private sector, maintaining strong and diverse international relationships, and optimizing the UAE’s resources.
Mubadala is looking to create the next new clusters such as supporting the energy transition. Our recent partnership with ADNOC and TAQA will propel Masdar’s renewable capacity to more than 50GW by 2030 and create a global clean energy powerhouse. This partnership will also support the UAE’s role in the energy transition and contribute to its strategic goal of achieving carbon neutrality by 2050, while becoming a global leader in green hydrogen.
[GSWF] How will Mubadala fund its ambitious growth plans? Do you expect to make distributions?
[MIC] Mubadala has set the ambitious goal of doubling our portfolio while maintaining sustainable financial returns, supporting Abu Dhabi’s diversification and positively impacting the communities where we invest. Reaching our target will require a dynamic approach comprised of active management of our investments and growing our global partnerships as well as the appropriate and conservative use of leverage. This will be supported by the prudent and pragmatic monetization of existing investments and recycling of capital into new investments. Mubadala also has an established and prudent dividends policy and, consistent with other economically-driven entities, during any given year we assess our balance between potential new investments and distributions.
[GSWF] In 2020, Mubadala sold almost as much as it invested. How are you pursuing monetization?
[MIC] 2020 was one of our most successful years, during which we achieved record investments, profit and growth. We deployed US$ 29.4 billion while realizing US$ 28.3 billion through monetizations and distributions. 2021 has also been one of our most active years. Our investments this year have involved global partnerships with BlackRock, Silver Lake, SoftBank, Bpifrance, and the UK government, to name just a few. Monetization activities included the partial sale of Aldar, one of the largest private share purchases in a UAE-listed company, the IPO of Yahsat, our first-ever listing on ADX; and the listing of GlobalFoundries on the NASDAQ, one of the largest IPOs of 2021.
[GSWF] Mubadala has been very active in green energy, especially via Masdar, but also in oil and gas. Why?
[MIC] As we drive to double the size of our portfolio, our relative exposure to the hydrocarbon industries is intended to reduce over time. While our strategy calls for significant and focused investment in high growth sectors with strong tailwinds such as technology, life sciences, fintech, renewable energy and traditional infrastructure, natural gas, for example, is expected to remain part of our capital deployment in the immediate future in support of the transition to cleaner energy alternatives. More broadly, Mubadala is investing in a range of energy assets and initiatives, from renewables to partnerships focused on the development and commercialization of the green hydrogen market.
[GSWF] In 2021, Mubadala restructured itself into five main business lines. What was the rationale?
[MIC] To achieve our growth plans, we reorganized our structure to create five distinct platforms that align us with our mandate as well as facilitate Abu Dhabi’s integration with the global economy.
UAE Investments: This platform consolidates all Mubadala’s domestic assets. Significant highlights include the landmark listing of Yahsat (Mubadala’s first IPO) and the partial monetization of Aldar.
Direct Investments: This platform focuses on global high growth, high profitability sectors such as life sciences, tech and financial services. It has had an active year that included the US $26 billion listing of GlobalFoundries.
Disruptive Investments: This platform includes asset management subsidiary Mubadala Capital, as well as Ventures & Growth, Credit Investments, and Country Direct Investment Programs in Russia & CIS, France, China, and the UK.
Real Estate and Infrastructure Investments: This platform focuses on physical and digital assets around the world. Investments included CityFibre and Calisen in the UK, and logistics deals in Australia, Korea, and Mexico.
Globally Diversified Investments: ADIC focuses on international direct and indirect investments across private and public markets by selecting top-quartile fund managers combined with an active asset allocation policy.
[GSWF] Let’s talk about Mubadala Capital, which recently became a subsidiary of the parent company
[MIC] Although Mubadala Capital recently commenced operations as a standalone portfolio company, it remains a wholly-owned asset, enabling it to pursue its highly focused investment strategies while leveraging Mubadala’s scale and network. Mubadala Capital’s management of third-party capital makes it unique among Mubadala’s businesses, and its success in attracting global blue-chip investors has positioned it well to maintain its growth trajectory going forward. Today, the company manages over US$ 9 billion in third-party capital on behalf of its institutional investors.
[GSWF] How are the Country Direct Investment Programs scoped and motivated?
[MIC] Our strong focus on partnership is one of our greatest strengths that makes us unique. Our country-specific partnerships are focused on strong economic fundamentals and the conviction that allows us to develop relationships and commercially driven direct investment programs in key markets including Russia & CIS, France, China, and the UK.
[GSWF] Where do you see growth going forward and what regions and industries are you bullish on?
[MIC] Even though our focus has been largely on private equity, we have a diversified portfolio that is balanced across asset classes and sectors. We’ve built a dynamic engine that allows us to capitalize on various short- and long-term trends that are fundamental to our investment thesis. We’re not exclusive to any particular sectors but we continue to focus on developed markets and are bullish on emerging economies like India and China.
[GSWF] What are your global strategy and growth aspirations?
[MIC] Mubadala now has a global network of offices, which includes London, New York, Moscow and Beijing as well as our headquarters in Abu Dhabi. As we continue to grow, we will assess the benefits of opening new offices in other markets. A local presence allows us to be closer to the markets where we invest, helps with sourcing deals, and strengthens our global partnerships – a key focus for us. We also believe that our expanding footprint offers an invaluable opportunity to identify, cultivate and develop talent - both within our organization and locally - in ways that will help our people achieve their potential and positively contribute to the Mubadala story and to the communities in which we invest.
From “Development” to “Strategic”:
Until 2017, Mubadala was characterized as a “Development Fund”: its teams and portfolios were organized in sectors (Petroleum & Petrochemicals; Aerospace, Renewables & ICT; Technology, Manufacturing & Mining; and Alternative Investments & Infrastructure), its asset allocation was structured around industries as opposed to asset classes, and the annual review talked about revenues instead of returns.
Since then, the fund has evolved beyond its development mission and started thinking very differently. Its 2019 annual review offered a first glimpse into its asset allocation; in 2020, it started reporting financial returns; and in January 2021, it announced a change in its structure, which would separate local and global holdings, and adapt to the increasing weight of technology and alternative investments in its portfolio.
The changes in Mubadala’s geographical preferences are also very evident. From 2019 to 2020, the UAE portfolio decreased from 28% to 20% of AuM as it pivoted towards Asia and Pacific, thanks to the US$ 2 billion spent in Indian conglomerate Reliance (RRVL and Jio), among others. While the geographical split at the end of 2021 is still not available, the activity seen during the year leads us to believe it will maintain this course.
In 2021, Mubadala displayed a high level of deal activity across a variety of sectors and geographies. The Credit Investments team closed a record volume of transactions with combined assets of c. US$ 1 billion.
The Life Sciences team invested in Evotec’s Nasdaq IPO, which supported the German drug discovery company in raising an additional US$ 500 million to develop its biologics manufacturing capacity. The team also invested in Rodenstock, the premium ophthalmic lens producer and supported PCI Pharma with the acquisition of LSNE (Lyophilization Services of New England), a premier contract development and manufacturing organization. This acquisition helped to expand PCI’s breadth of services.
Renewable energy was also high on the agenda, with investments in Israel (Masdar-EDF JV), Brazil (Renova Energia), Uzbekistan (Nur Navoi Solar), Greece (Taaleri Solar) and Armenia (Ayg-1 project with ANIF). Masdar, Mubadala’s future energy subsidiary, has become one of the world’s largest investors in clean energy, with a US$ 20 billion portfolio of wind and solar farms all around the world. In December 2021, the Crown Prince of Abu Dhabi announced the consolidation of Mubadala’s, ADQ-TAQA’s and ADNOC’s renewable and hydrogen assets, under Masdar with the expectation of reaching 50GW of total capacity by 2030.
Other significant deals in 2021 included real estate (logistics in Australia and the US and residential in the Netherlands and Russia), infrastructure (MetrôRio in Brazil and CityFibre in the UK), water filtration (Culligan in the US), healthcare (Certara in the US, Activos and IVC in Europe, and UEMedical in the UAE), and some other PE transactions via Mubadala Capital (K-MAC, Apex, and Archer). But the most active group was without a doubt Mubadala Ventures, which has become one of the most prominent VC investors worldwide.
In October 2017, Mubadala announced the launch of its latest business, Mubadala Ventures, which would oversee the US$ 15 billion commitment its parent company had done in Softbank Vision Fund I. In addition, the subsidiary would look at managing a US$ 1 billion portfolio, comprised of a US Venture Fund (Series A+), a Fund of Funds, a European fund (Series B+) and a UAE-focused early-stage fund. All of this is managed by a small team based in San Francisco, London (in a Mayfair office steps away from Softbank’s) and Abu Dhabi.
According to Global SWF Data Platform, since 2017 Mubadala Ventures has invested in 75 startups. Over half of those funding rounds happened in 2021, when we estimate it may have deployed US$ 1.4 billion. The investor covers all stages of development from Series A to pre-IPO rounds, and the big majority of the portfolio companies sit in the US and Europe, although it has also started investing in the UAE, India, and China.
The team leverages on a strong connectivity to Chinese VCs through other Mubadala Capital managed vehicles. The Country Direct Investment Programs have facilitated investment programs with China (CDBC, SAFE), Russia (RDIF), France (Bpifrance), Greece (HDBI) and Kazakhstan (Baiterek). In addition, in 2021, Mubadala signed a commitment with the UK’s Office for Investment (OfI) to deploy US$ 13.3 billion in British life sciences, energy transition, infrastructure and technology assets over the next five years.
All in all, the sovereign investor has grown and evolved significantly in the past five years. It is difficult to predict how it will look in another eight or nine years when it expects to grow double the size of its portfolio – but it will surely keep evolving with both the domestic and global investment landscape.
2021 marked a year of a unicorn population explosion and the birth of decacorns on a tidal surge of Venture Capital, with sovereign investors at the crest of the tsunami. While VC remains a small slice of SOIs’ overall portfolios, allocations provide them with exposure to market disruptors with high growth potential. Valuations are at all-time highs encouraged by a fast pace of exits and strong liquidity potential, including IPOs and SPACs.
Top-Line Figures: 2021 Heralded VC Boom
Venture capital by SOIs in 2021 surged 81% over 2020 levels to a record US$ 18.2 billion, with the number of deals more than doubling to 328. In the past six years, SOIs have invested a total of US$ 117 billion in 1,101 deals – including investments in the tech-focused SoftBank Vision Fund 1 by PIF (US$ 45 billion) and Mubadala (US$ 15 billion) in 2016 and 2017, respectively. SVF1’s investments ended in 2020, having backed a range of start-ups from WeWork to Uber. SOIs did not support SoftBank Vision Fund 2, signaling the evolution and improved capability of SOIs, which now prefer to develop their own venture capital expertise in-house.
Temasek has consistently had the biggest appetite for VC and 2021 was no exception. In 2021, it invested US$ 5.1 billion, well ahead of GIC (US$ 2.8 billion) and CPP (US$ 2.7 billion). The pandemic provoked a seismic change in strategy, with a shift towards sectors that are set to soar amid the change in lifestyles, consumer behavior, and public needs. SOIs are betting on increasing use of technology in every sector of life with emerging markets the key driver of growth as the digital economy grows exponentially.
Technology was the most popular sector with US$ 6.9 billion, 40% more than in 2020. But the most impressive y-o-y growth was observed in Retail & Consumer and Healthcare segments, which have benefitted from the radical shift elicited by Covid-19. The former saw increased interest in e-commerce platforms to capitalize on changing consumer behavior, and the latter drew in capital attracted to biotech and healthtech.
IPOs Boost Allocations to Late-Stage VC
Global SWF’s transaction database shows that both in volume and value terms, SOIs have shifted towards later funding series, focusing on growth and late-stage investments. This should not be seen as undue intensity in mature, large VC-backed enterprises, but as desire to back start-ups through the company lifecycle to IPO stage. Sovereign funds invested more than US$ 3 billion in pre-IPOs – a sixth of the total value in 2021 – with many of them acting as anchor investors in public floats of start-ups they had backed in earlier stages.
In terms of individual funding rounds, Series C was the most popular target, representing 27% of the total, followed by Series D (17%) as SOIs picked out established start-ups at growth stage. The volume of Series C and Series D investments grew two-fold and three-fold, respectively, while at the same time the volume of Series A deals actually fell 24%, continuing the trend that was evident with before the onset of the pandemic.
Geography: VC Goes Global
With its strong R&D community, especially in biotech and healthtech, it came as no surprise that just over a third of SOI investment flowed into start-ups in the USA. In 2021, SOIs participated in twice as many funding rounds for American startups than they did in 2020, and we saw growth in every segment of the USA market. Yet, there was a clear shift into Asian markets (particularly, China and India), and, overall, startups from 33 countries received some form of financing from SOIs, which represented a new level of globalization for VC.
The Chinese market seems to have waned slightly since October, amid a clampdown on Big Tech and Beijing’s antipathy towards Chinese IPOs in the US. Billions of dollars were wiped off start-up values as the government moved from EdTech to gaming, wary of their growing power within China. The slash in asset values should be of concern to Temasek in particular, with 27% of its portfolio (underlying assets) exposed to China – more than its exposure to its home market.
Foreign capital was banned from China’s edtech sector in 2021, posing massive headaches for both Temasek and GIC as well as SVF1, which was heavily invested on behalf of PIF and Mubadala. Startups like Kuaishou and Yuanfudao were highly successful during the fundraising process but are now forced to go non-profit, and investors have found themselves stuck without many options. However, SOIs are likely to wise up to the risks, rather than withdraw from Chinese VC, thanks to their flexibility and long-term horizon. Lessons are being learned and Temasek appears undaunted, as it continues to back biotech, life sciences, gaming and e-commerce, from Didi Freight Unit to 3D printer WeNext.
The big surprise of the year was the attention commanded by Indian start-ups, largely due to a rapidly evolving digital economy, a relatively open economy and robust valuations at IPO stage. In July, food delivery company Zomato went public with US$ 0.6 billion gained from 186 anchor investors including ADIA, CPP, GIC and OMERS. Temasek had invested in its Series J in 2020 – and likely achieved a big return on exit. Also in July, e-commerce platform Flipkart raised US$ 3.6 billion with a new funding round that included ADQ, CPP, GIC, Khazanah and QIA, and consolidated its position as India’s largest unicorn. Other Indian unicorns chased by SOIs included Byju’s, Ola, Delhivery, PolicyBazaar, and Sharechat.
India is also not without challenges and there are significant risks for investors, especially around loss-making start-ups with big ticket valuations. If private equity funding rounds or IPOs don’t match expectations, there is a danger that asset values come under attrition. Temasek suffered a significant setback with Indian ride-hailing app Ola, after opting out of funding rounds, which diluted its stake, and after the pandemic, which drove the app’s valuation down a 25%. India will likely position itself as a Western ally amid rivalries with China, creating a regulatory environment that provides better protections for tech companies.
Domestic SOIs are directly responsible for the emergence of other VC ecosystems around the world, including Singapore (GIC, Temasek), France (Bpifrance), Canada (CDPQ, CPP, OMERS and OTPP), and Abu Dhabi (ADQ, Mubadala). The UK continues to be miles behind the US, but it continues to push the agenda thanks to the British Business Bank’s Future Fund. The presence in the chart of other geographies such as Indonesia, Brazil, Turkey and Germany, with four to five deals each, seems to be promising and may stick in 2022.
Players: Temasek Leads, Others Follow
Temasek has been ahead of the curve in terms of developing its VC strategy, much of which has been carried out by Vertex Ventures. While the SOI universe has shifted towards later stage VC, Temasek is focusing on early-stage funding – largely at home. In 2021, 20% of Temasek’s VC was deployed in early-stage Series A and B rounds (up from 15% in 2020). Series C rounds were still its most popular target, contributing to 39% of the total value. With a strong appetite for healthcare, tech, and e-commerce, Temasek made a significant pivot to China and India, which represented 25% and 23% of its VC investment – up from 18% and 10% in 2020.
In terms of early-stage start-ups, Temasek has focused on supporting the deep-tech innovation sector in Singapore, to help the country become a global hub for life sciences, foodtech and advanced manufacturing. The investor is also establishing its own suite of in-house start-ups, such as AI tech and solutions provider Aicadium, travel pass software developer Affinidi, and cybersecurity company Istari. Temasek’s efforts are accompanied by the government-backed SG Equity, which supports biopharma, medtech, and agtech start-ups.
Unlike Temasek, GIC is mandated to invest overseas only, and its focus is on later-stage VC. Nearly half the value of its VC allocation was in pre-IPO rounds while just 7% was in Series A and B. Indian start-ups garnered the most attention from the SWF, making up 47% of its VC in e-commerce platforms such as Flipkart, Zomato and Delhivery, followed by the USA with 25% in Silicon Valley tech companies.
Outside of Singapore, Korea’s NPS – the world’s second biggest PPF – dipped its toe further into the VC pool with the goal of US$ 0.8 billion allocation by the end of 2021. It is shrugging off its reputation as a conservative investor to tap into the fast growth of Korea’s home-birthed unicorns and successful IPO exits. Yet, VC still represents little over 1% of its total AUM, indicating room for accelerated investing in the future.
Canadian funds are further ahead in deal origination, especially in the last couple of years. Altogether, they deployed US$ 5.2 billion in VC in 2021 – a two-fold leap from the previous year. CPP led the pack with more than half of that amount deployed in 23 funding rounds. OTPP is planning to ramp up its bets on start-ups by at least US$ 12 billion by 2026, thanks to its Teachers Innovation Platform (TIP), which launched in 2019. Its stablemate OMERS is arguably the most experienced PPF in the VC sector, with OMERS Ventures celebrating its 10th anniversary in 2021. Its lion’s share was dedicated to the technology sector and to domestic start-ups.
Turning to the Gulf, we find some upcoming players such as ADQ. In 2020, the newly formed SOI made a surprising shift in emphasis from Infra to VC, by establishing the Alpha Wave Incubation Fund and buying interests in start-ups in India and Southeast Asia. In 2021, it invested US$ 0.6 billion in VC, including Flipkart, PolicyBazaar and Byju’s in India; Getir and Trendyol in Turkey; and Amoun in Egypt. The investor’s intentions are serious as signaled by the hiring of seasoned professionals and the setup of a VC-focused subsidiary, ADG.
An experienced VC investor, Mubadala is less risk-averse and, since the full deployment of SVF1 in 2020, it has sought to emulate its tech-oriented early-stage strategy. Series A and B rounds made up 43% of Mubadala’s deal volume in 2021, and we expect that the spin-off of Mubadala Capital as a wholly-owned asset management will give the VC team even further autonomy. The significant monetizations that the investor is pursuing, including GlobalFoundries’ and Yahsat’s IPOs in 2021, will also provide it with plenty of dry powder.
The Middle East’s four largest SWFs were also active buyers of VC in 2021, with 25 deals altogether. Half of them were completed by QIA – more than in all previous years combined – with activity not only in the US, where its Head of Technology sits, but also in India, Turkey and the UK. ADIA focused on late-stage funding of Indian and Indonesian start-ups and KIA invested in North Africa's rapidly growing startup ecosystem. Lastly, PIF was not as active in VC as in previous years, but it scored one of the best goals of the season when Lucid Motors went public in July. The Saudi fund invested US$ 1.3 billion for 63% of Lucid in 2018, when the startup was running short of money. Three years later, the stake is worth US$ 41 billion, and the transaction showcases the competitive advantage of SWFs when it comes to VC investing, thanks to liquidity and long-term horizon.
The rest of the activity we tracked in 2021 came from strategic funds supporting the domestic VC ecosystem. This included Bpifrance in France, ISIF in Ireland, RDIF in Russia, Khazanah in Malaysia (and China), and NIIF in India, which has also flexed its mandate for the fear of missing out the momentum in local start-ups.
Outlook: High Risk
The feverish activity of 2021 raises concerns over whether valuations are realistic, although any VC investor will be mindful that risk is the nature of the game and early-stage start-ups have a high mortality rate. The huge heft of sovereign investors means that a certain amount of failure can be easily absorbed.
China’s clampdown on Big Tech could augur similar moves in other markets where concerns over privacy and the power of tech companies, particularly social media, could clip the value of start-ups favored by SOIs. Regulatory action against monopolistic behavior and threats to data and cybersecurity are not going away, but thanks to their inter-generational goals, SOIs can afford to be patient as well as increasingly nimble.
We anticipate more SOIs entering the VC space, including strategic investors. India’s NIIF and Indonesia’s INA made their first tentative steps into VC in 2021 to support domestic start-ups, and they are eager to forge relations with foreign SOIs to support the VC ecosystem. This would mirror Temasek’s strategy of cultivating home-grown tech to boost national R&D and, in turn, economic competitiveness.
We expect fintech, e-commerce, and biotechnology to remain major VC targets for SOIs, but ESG will be an overriding theme with sustainability and climate change increasingly at the heart of SOI strategy. As such, capital will flow into ESG-related tech and limiting the impact of climate change.
Regulatory shifts concerning SPACs and public market volatility could upset IPOs, undermining exits for assets targeted by SOIs. With listings potentially delayed to achieve more optimal valuations, we can expect a rebalancing of SOI investment in VC towards early-stage and growth-stage.
Australia emerged as a hot destination for state-owned investors in 2021, reaching new heights as US$ 23.8 billion was poured into real estate, infrastructure assets and private equities. Global SWF believes the trend will persist as the government drives forward its infrastructure program, capitalizing on the country's geographical and resource strengths to play a leading role in regional economic integration.
Real assets have long been a focus for SOIs investing in Australia and 2021 was no exception. In terms of value, infrastructure represented 47% of the total for the year and real estate, a 39%, with the remainder made up of private equity. Foreign state-owned investors took the lead, contributing to 69% of the total.
Canadian pension funds feature prominently in the Australian markets, representing 31% of the total sovereign capital in the country since January 2016. They are also the funds that have established offices in Australia’s financial capital Sydney, beginning with OPTrust in 2013 with OMERS, CDPQ and CPP entering in each subsequent year. Dutch investor Bouwinvest joined them in 2019, and Singapore’s GIC will do so in 2022.
In 2021, CPP, CDPQ, OMERS and OTPP each invested over US$ 2 billion in Australia. However, they were eclipsed by GIC, which invested US$3.7 billion. Over the past six years, the Singaporean fund has deployed over US$ 12 billion Down Under, making it the biggest investor among sovereign funds.
There is yet another twist to Australian public finances and a link between its inflows and outflows of capital. In 2018, the state government established the NSW Generations Fund (NGF) with US$ 7.3 billion from reserves and from the sale of a 51% stake in WestConnex. In 2021, when the remaining 49% of the motorway was sold, the revenue was used to alleviate public debt levels and boost the growth of the NGF. In other words, the domestic SWFs was funded through the acquisition of prime domestic assets by foreign sovereign investors. According to the NSW budget 2021-2022, the NGF is expected to grow 7.5 times to US$ 65 billion in 10 years thanks to such foreign acquisitions and to the issuance of debt. The entity expects to market bonds at a rate of 1.5%, which compares to the fund’s target investment return of about 6.5%.
What distinguishes Australia from other markets is the role of domestic funds, which often establish consortia with foreign SOIs in bidding for big ticket assets. Australia hosts nine federal-level funds with combined AuM of US$ 736 billion in 2021, and 11 state-level funds with US$ 428 billion – altogether, the country has US$ 1.2 trillion in its balance sheet spanning sovereign wealth funds and superannuation funds.
The most prominent and active federal funds are the Future Fund, AustralianSuper and newly-created Australian Retirement Trust (ART), which will become the second largest federal superannuation fund. At a sub-national level, the NSW Treasury Corporation (TCorp), the Queensland Investment Corporation (QIC), and the Victoria Funds Management Corporation (VFMC) are among the biggest and most active state investors.
Future Fund has over 40% of its portfolio invested in alternatives, which is remarkable for a savings fund, and has a strong global network of asset managers to offset the lack of offices overseas. QIC is highly focused on real assets with a significant foreign portfolio, while TCorp and VFMC are smaller and more domestic. AustralianSuper has a more conservative investment profile with 79% of its portfolio in liquid assets.
Deal activity and size are not the only factors that make Australian funds stand out. They are also known for their best practices, and Future Fund was the only SOI to have a perfect score in our 2021 GSR Scoreboard, which assesses the efforts of global investors around Governance, Sustainability and Resilience.
Triggered by the declining returns and pressure on costs caused by Covid-19, the Australian regulator is calling on superannuation schemes to consider mergers & acquisitions that increase their scale and allow them to provide attractive investment options at competitive fees. Consolidation has been ongoing on for a several years: from 2013 to 2019, the number of funds regulated by APRA decreased from 279 to 185. Only since 2020, we have seen nine M&A processes that have involved the pensions of 8.6 million Australians.
The M&A transactions take very different shapes and forms. The recent acquisition of Club Plus Super by AustralianSuper represented the swallowing of a smaller fish by a larger one, but some other deals are mergers of equals with a new name adopted by the NewCo, such as the merger between QSuper and SunSuper to form Australian Retirement Trust (ART) in early 2022. Others are more akin to a change in name (e.g., LGS becoming Active Super) or to a pooling mechanism without legal changes (e.g., MaritimeSuper and HostPlus).
In any case, the creation of these larger pools of capital is a game-changer for the global investment landscape. AustralianSuper, ART and Aware Super are now funds with more than US$ 100 billion each that compete and co-invest with other state-owned investors both at home and abroad – a trend that is also observed among British pension funds and with Middle Eastern sovereign entities (both SWFs and PPFs).
Real Assets: The Big Attraction
Investment in Australian infrastructure was boosted by one deal: the sale of a 49% stake in the 70 km WestConnex motorway that links Sydney's west to the city center, Port Botany (partly owned by ADIA) and Sydney Airport (in the process of being invested by AustralianSuper and ART among others). Led by giant operator Transurban, a consortium including ADIA, AustralianSuper, and CDPQ bought the remaining 49% stake in WestConnex for US$ 8.0 billion. The NSW Government plans to transfer the proceeds to the NSW Generations Fund (NGF), a sovereign fund managed by TCorp, although most of it was used to pay off debt.
In another high-profile deal, OTPP and PSP invested alongside KKR to take over Spark Infrastructure for US$ 3.7 billion (12% above its share price value). Spark possesses US$ 12.2 billion of electricity network assets including a 15% stake in Transgrid, Boman Solar Farm (100MW in operation and 2.2GW in development), and 49% of distributor SA Power Networks and of Victoria distributors Citipower and Powercor.
Deal activity continued unabated in the real estate sector, covering offices, retail, logistics, residential and industrial sectors. Sydney and Melbourne are seeing high levels of demand for offices that have pushed up rents, while land constraints in prime locales – such as central business districts – have pushed up asset prices. Industrial and logistics is focused on coastal areas with supportive networks, particularly in cities such as Perth.
Logistics real estate saw rapid growth in Australia, in line with the global growth in response to the changing nature of consumption patterns, accelerated by Covid-19. Domestic-foreign tie-ups were prominent. In a major leap forward for the sector, CDPQ subsidiary Ivanhoé Cambridge teamed up with AustralianSuper and TCorp to acquire the Moorebank Logistics Park for a total of US$ 1.5 billion. ESR and LOGOS emerged as on-the-ground partners for GIC and CDPQ, respectively, in 2021. In April of 2021, Mubadala forged a three-way partnership with LOGOS and KKR in its first foray into the Australian logistics space.
These partnerships are a stepping-stone for SOIs to originate their own deals, providing the basis for understanding the market and its opportunities. As such, foreign SOIs are likely to move from JVs with domestic SOIs and asset managers towards establishing their own teams and driving their own deals.
In the office market, 2021 saw two major transactions: GIC’s partnership with Charter Hall to purchase 50 Marcus Clarke St in Canberra and NPS’s acquisition of One Melbourne Quarter. Yet, there were also divestments of offices with CPP offloading three office blocks and two shopping malls (which it shared with ADIA) for US$ 1.7 billion and GIC selling its 49% in Australian Logistics Trust to Blackstone for US$ 1.5 billion. The transaction activity reflected the robust growth in Australia’s office market despite remote working arrangements and flexible workspaces, with SOIs confident of long-term yield and ability to divest on maturity.
Outlook: Infra is the Mainstay, but VC is Set to Pick Up
Australia's energy and utilities infrastructure network is mature, but there are opportunities for growth, particularly in the fast-growing renewable energy segment. The country is expected to gradually phase out coal-fired thermal electricity generation in favor of renewables, with wind and solar power leading growth. Improvements in transmission and distribution infrastructure and battery storage capacity will also feature prominently in the infrastructure growth story. The pressure is on to improve electricity grid infrastructure to support the rise of electric vehicles, among other new household electricity requirements.
Transport infrastructure will remain a growth area, the majority of which will be comprised of road construction. The government's 10-year US$ 79 billion Infrastructure Investment Programme (IIP) will drive investment in roads with SOIs likely to pay interest in roads of strategic importance, which connect businesses to local and international markets. Airports, seaports, and railways will also remain highly attractive – areas where foreign sovereign investors have already established investments, such as the Port of Melbourne (CIC, GPIF, NPS, OMERS), Port of Brisbane (ADIA, CDPQ), and NSW Ports – Botany and Kembla (ADIA).
SOIs could play a role in helping deliver upgrades and the construction of transport corridors. WestConnex is likely to be a template for PPPs to help the government attract private capital and co-fund projects. One upcoming megaproject is the US$ 8.4 billion North-East Link in Melbourne with Spark Infrastructure winning the bid to build and operate the 6.5 km of beneath the Yarra River and Banyule Flats, linking the Metropolitan Ring Road to the Eastern Freeway at Bulleen in Melbourne’s Northeast.
An under-explored area is local VC for digital disruption, fintech, e-commerce or alternative proteins. These are exactly the areas that are currently exciting SOIs, but for some reason, Australian start-ups and VC funds have not been as prominent as their overseas counterparts. The exception may be Blackbird Ventures, which has attracted funding from domestic SOIs with investments valued at US$ 7.2 billion and an IRR of 81%.
The potential for Australian VC is likely to be realized in coming years, especially as Singapore’s GIC establishes its operations. Like its sister fund Temasek, GIC has an aggressive VC strategy alongside its interest in big ticket infrastructure investments. And where the Singaporean investors go, peers are bound to follow. We would not be surprised if Canadian funds also use their existing real assets platforms to diversify into VC.
During times of economic crisis and recession, healthcare has proven to be resilient and a strong performer. For sovereign investors, it is a defensive growth sector that can ride out shocks and uncertainties – simply because it is an essential service. Yet, the global health crisis has added an extra boost to this broad sector, which can be divided into four major segments: biotech, pharma, devices, and services.
The Covid-19 pandemic brought challenges as well as opportunities for the healthcare industry. Unprecedented global collaboration to discover vaccines and treatments for the virus boosted capital in healthcare businesses with biotechnology gaining increased importance.
Sovereign investors flocked to the biotech sector, as other sectors faced heightened risks due to lockdowns, while healthcare provision gained increasing relevance for society and the economy. The move has put boosters on a process of biomedical scientific progress that was already underway and created numerous unicorns out of startups as governments relied on health technology as a route out of the crisis.
Global SWF data shows that the value of SOI investments in healthcare almost tripled to US$ 13.4 billion in 2021. Direct investment accounted for 43% of this figure with 35% comprised of co-investments, 18% venture capital and the remainder allocated to healthcare-focused private equity funds and listed equities.
In deal volume terms, Venture Capital represented 63% of transactions across the year with an average ticket of US$ 44 million. SOIs investing in healthcare startups were looking for already established players that needed capital to expand markets and broaden their research and product pipeline. As such, almost three quarters of all VC in healthcare was devoted to series C or later funding rounds, mostly in biotech.
Direct private equity investment, including co-investment, was channeled into more mature, chunkier assets that were either traditional pharmaceutical producers – albeit branching out into new modalities in research – or clinical service providers and medical device suppliers. Although fewer in number, the deals were large and for some SOIs were part of a strategy to develop an integrated approach to healthcare investment.
Biotech: Temasek at the Cutting Edge, RDIF goes all in
According to Eroom’s law, drug discovery is slower and increasingly expensive over time. However, new approaches and technologies including AI are set to make this process faster, safer, and more effective. For investors, this means lower risks, higher asset value growth potential, and better returns on exit. The pandemic accelerated this process, particularly in mRNA with vaccine producers Moderna and BioNTech (Pfizer) – backed by ADIA and Temasek, respectively – leaping in value and encouraging a flood of capital.
ADIA funneled US$ 100 million into Moderna’s Series G in 2018 and saw the value of its investment grow by 22x after the company was approved to produce Covid-19 vaccines in 2020. Temasek also moved quickly and invested in BioNTech in June 2020, before Pfizer vaccines were available. Russia’s RDIF was instrumental in funding and even distributing Sputnik V, which was the first Covid-19 vaccine to be launched.
Other funds, such as NBIM, owned shares in AstraZeneca, Sinopharm and Johnson&Johnson, which participated in vaccine development. However, the impact on stock price from Mar’20 to Dec’21 varied considerably, from +36% for AstraZeneca and +27% for J&J to +3% for Sinopharm amid concerns over profits. The success of vaccines was determined not only by efficacy but also by geopolitics and international relations.
In 2021, Temasek led drug discovery and deepened its exposure to coronavirus treatment by backing several Chinese vaccine developers, including Clover Biopharmaceuticals, Suzhou Abogen Biosciences, Abiochem and Wuhan Binhui Biotech. It also deployed capital into British and US startups dedicated to genetics research, notably US$ 200 million in G2 Bio Companies and US$ 40 million in Cambridge Epigenetix.
Other sovereign investors followed suit, including Canada’s CPP and Abu Dhabi’s Mubadala. The former focused on growth stage venture capital in the US including AI-driven Inistro, while the latter diversified with bets in the UK and India. At the beginning of the year, a Series B in a gene writing business called Tessera Therapeutics brought together SVF2, QIA and Alaska PFC, which has been dubbed the “king of biotech”. The Us state-level fund has invested US$ 2.5 billion in the segment since 2013, generating net returns of over 102%.
Pharma: ADQ Builds its Integrated Healthcare Cluster
In pharmaceuticals, Abu Dhabi-based ADQ‘s activity was notable as it bought up established manufacturers in its pursuit for diversification. Deals included its acquisition of Acino, for an amount equating to the combined value of all SOI investments in drug discovery. Unlike startups, the Swiss company already leads novel drug delivery in several therapeutic areas, spanning the entire globe with a strong pharmaceutical manufacturing base. It also maintains a collaboration agreement with Pharmax to license, manufacture, and supply select Acino products across the Middle East and Africa, fitting with the Abu Dhabi investor’s strategy.
ADQ also acquired 90% of Egypt’s Amoun Pharmaceutical with TSFE taking the remainder, in the context of closer economic and political links between Abu Dhabi and Cairo. ADQ’s pharma portfolio covers the full pharma value chain, including a stake in Indian biosimilars producer Biocon Biologics and online retailer PharmEasy, as well as UAE-based Pharmax, SEHA and Union71. Its activities are complemented by Mubadala, which signed an agreement with G42 to establish a biopharmaceutical manufacturing campus in Abu Dhabi.
Devices: Established SWFs take the lead
The medical device sector is another area of innovation, supporting non-invasive surgery and the application of robotics to reduce risk and speed up recovery. Due to the pandemic, there was a perceptible market shift towards ventilators and diagnostics. ADIA and GIC invested in a consortium of Blackstone, Carlyle and Hellman & Friedman to buy a majority stake in medical supplier Medline Industries in a multi-billion-dollar transaction. Medline is one of the largest privately-held manufacturers and distributors of medicals supplies such as surgical equipment, gloves, and laboratory devices used by hospitals around the world.
QIA was one of the biggest buyers in the segment in 2021 with a US$ 0.5 billion investment in German producer Siemens Healthineers, which was used to pay for the acquisition of US peer Varian in its bid to become a world leader in cancer care therapy. In the diagnostics segment, Mubadala and Khazanah focused on venture capital in the US and China. The former led a US$70 million Series A round for Xilis which has a mission to transform cancer care in diagnostics and the latter led a US$88 million venture round for Chinese clinical laboratory service Adicon. Canada’s OMERS teamed up with Goldman Sachs and AXA to take over leading European laboratory diagnostics provider Amedes and CDPQ took a significant minority stake in Mexican medical diagnostics services provider Grupo Diagnóstico Aries, giving it exposure to a high-growth market.
Services: Focus on Emerging Markets and Healthtech
Sovereign investors showed interest in patient care and healthcare services, which are typically mature assets. Acquiring hospitals and clinics as well as ancillary products and services enables investors to respond to long-term trends: ageing societies in the developed world and rapidly growing middle-classes in emerging markets. For example, Mubadala continued developing a portfolio of healthcare assets with the acquisition of a 60% stake in UEMedical, adding to its network Danat Al Emarat Hospital, the HealthPlus Network of Specialty Centres, HealthPlus Fertility (the region’s largest IVF provider), and Moorfields Eye Hospital Abu Dhabi.
Singapore’s GIC also opted for high value stakes in care providers with a particular interest in emerging markets. In 2021, it snapped up a 16% stake in Malaysia’s Sunway Healthcare for US$180 million. Sunway Healthcare operates two tertiary hospitals and plans to build up to six more hospitals. It also led a consortium investing US$203 million in VMC, the parent of Vinmec International General Hospital, Vietnam’s premier private hospital developer and operator. But the SWF did not just restrict itself to emerging markets and made a US$1 billion investment in Biomat USA, which operates a network of blood plasma collection centers.
India’s NIIF also joined the pack with the acquisition of a minority share in the country’s Manipal Hospitals for a US$ 0.3 billion, helping its purchase of Columbia Asia Hospitals. Manipal already had the backing of Temasek, which acquired an 18% stake in 2017. The hospital operator is planning an IPO by 2024.
Canadian funds opted to concentrate on US service providers, indicating more risk-aversion than their SWF counterparts. CDPQ teamed up with Centerbridge Partners to acquire Medical Solutions, which provides clinical staff for hospitals and care facilities in the US. Meanwhile, OTPP looked to invest in more specialized care, taking a majority stake in Acorn Health, a leading US provider of therapy for autistic children.
Yet, service provision is also changing as it too is touched by tech, developing services beyond physical clinics and hospitals to deliver telemedicine. Investment in healthtech accelerated as the world adapted to remote working and mobile apps, spurring development and adoption of telehealth and other digital solutions. Investment was also stimulated by the relaxation of regulations of low-risk digital health devices and services.
Temasek led SOI investments in healthtech solutions, representing five of 13 deals – mostly VC. One of its biggest investments was in Helix, a consumer genomics company that provides customers with personalized products based on DNA. ADIA secured a significant minority stake in Italy’s Dedalus, a provider of healthcare information and clinical and administrative software to hospitals, clinics and laboratories.
Another software provider seeking market disruption, Kry received more than US$ 0.3 billion in a Series D round led by CPP with participation from existing investors, including OTPP, to support its European expansion and development of patient-facing apps. Lastly, Mubadala and OMERS helped turn India’s Innovaccer, which provides software services to enable health-related data processing, into a unicorn.
The pandemic is changing the way in which SOIs invest and healthcare has come into focus as a source of significant long-term yield. Coronavirus is set to be an ongoing multi-year threat, adding impetus to the radical shift in biotech and healthtech that has changed the dynamic of medicine research and development. As 2022 progresses, SOIs will intensify their focus on R&D in virology with a view to keeping up with Covid-19 mutations. Demographics will also influence long-term trends with increasing focus on diseases and needs associated with rising affluence and an ageing population: diabetes, heart disease, cancer, and residential care.
Faced with a range of inter-related sectors, from drug discovery to care provision, state-owned investors are likely to develop strategies to take advantage of changing demand dynamics. Healthcare will add impetus to either total portfolio management or creating integrated subsidiaries, such as Mubadala Health, that can deploy capital across asset classes to adapt to a rapidly evolving context that requires multiple strategies, from public equities and corporate debt to venture capital and real estate.
2021 will be remembered as the first year in which SOIs made more green investments than black investments – more than three times the total value. This milestone was a few years in the making and has concluded a trend that has been driven by social pressure and financial returns and accelerated by the Covid-19 pandemic.
On the one hand, we saw very few investments in the oil and gas sector compared to past years. OTPP took over from ADIA and OMERS and acquired a 38% in Scotia Gas, and Mubadala completed several deals in Brazil (RLAM Refinery), Egypt (Block 4 field), Saudi (Aramco Pipelines), Israel (Tamar oilfield) and Russia (Sibur).
On the other hand, we saw the highest ever level of activity in renewables in history by state-owned investors, which spent US$ 22.7 billion in 37 different transactions. These took very diverse forms:
Acquisitions of brownfield assets, including NBIM’s purchase of 50% in Borssele 1 & 2 offshore windfarms in the Netherlands, OTPP’s bid for certain US assets of NextEra and APG’s takeover of Vasa Vind in Sweden;
Investments in greenfield assets, including ADQ’s and Samruk Kazyna‘s JV for new solar and windfarms in Kazakhstan and CDP Equity’s partnership with Eni to develop renewable energy assets in Italy;
Expansion of existing vehicles including Northvolt (AP Fonden, OMERS) and Generate Capital (FF, QIC);
Acquisition of shares in listed companies, such QIA’s in Iberdrola’s Avangrid; and
Commitments to new climate-focused funds, including Blackrock Decarbonization Partners (Temasek), Brookfield Global Transition Fund (Temasek, OTPP, PSP, IMCO) and TPG Rise Climate (OTPP, PIF, PSP).
The last two funds attracted unprecedented interest from the international community. Brookfield’s BGTF raised an initial US$ 7.0 billion, with the views of reaching US$ 12.5 billion; and TPG Rise Climate reached US$ 5.4 billion with a hard cap of US$ 7.0 billion. Sovereign investors are hungry – and pressured – to access and to deploy capital in high-quality, sustainable initiatives, and chances are that reputable managers will be very successful in the subsequent fundraising processes. We expect other major players to follow Blackrock, Brookfield and TPG in helping fill the gap in ESG investing in 2022 and beyond.
The other side of the coin is represented by the membership to certain organizations and signing up to their principles. SWFs have generally been slower than PPFs when it comes to such memberships although the UN-backed PRI and the One Planet SWF Group seemed to have gained some momentum in 2021. However, some of these underlying guidelines are not enforceable and can result in diversion or greenwashing.
Net Zero organizations are pushing for more accountability by forcing members to commit to specific goals year after year, and if these are not met, the funds must leave. Perhaps this is the reason we have not seen many SWFs joining them yet: only German quasi-SWF KENFO has signed up for the UN-convened Net Zero Asset Owner Alliance and only NZ Super has joined the PAII-driven Net Zero Asset Owners Commitment. Others including GIC and Temasek have not joined any group but outline their net zero goals in their annual reports.
2021 GSR Scoreboard:
Since July 2020, Global SWF has issued an annual assessment of the Governance, Sustainability and Resilience (“GSR”) efforts of state-owned investors. The GSR Scoreboard has become a critical tool of analysis and its results serve as a reality check for asset owners to quantify and improve their best practices, and it enables asset managers and portfolio companies to stay informed of crucial aspects of their stakeholders.
The scorecard raises 25 questions: 10 related to Governance and Transparency; 10 concerning Sustainability and Responsible Investing; and five on Resilience and Legitimacy. These questions are answered binarily (Yes / No) with equal weight and the results are converted into a percentage scale for each of the funds. The study is applied to 100 major SOIs, generating 2,500 data points, and may be expanded during 2022.
In 2021, and for second year in a row, the only fund to score 100% of all elements was the Future Fund. It was followed by CDPQ, NBIM, and NZ Super (all with a 96%), and AIMCo, NPS and Temasek (all with a 92%). The laggards continued to be the Middle Eastern funds, especially around governance and resilience issues. Overall, 39% of the funds failed the GSR test: CEOs sacked overnight (see page 45), managers prosecuted for misuse of public funds, and governance crisis are some of the red flags that are still too common in the industry.
Compared to the 2020 edition, we saw a certain degree of improvement. Nine of the Top 100 funds that were rated in the first year were replaced, and of the remaining 91 funds, 36 improved their scores, 21 stayed the same and 34 saw worsening performance. Some funds including LIA, FSDEA and PIC took positive steps to solve very difficult situations, and India’s NIIF and Indonesia’s INA started issued audited accounts.
The comparison of 2020 and 2021 makes it evident that Sustainability and ESG are an increasing priority at a Board level. Korea’s KIC published its first Sustainability report, Panama’s FAP became a signatory member of the UN PRI and Saudi Arabia’s PIF started building an ESG team. The One Planet SWF Group saw nine more SWFs sign up in 2020 and four more in 2021, although we are yet to see any practical actions.
However, resilience is still a problem. Most state-owned investors with a decreasing GSR score have issues with liquidity and spending control. After the significant withdrawals motivated by Covid-19, several funds were exhausted, and some others were reformulated or merged. Most have still a lot of work to do when it comes to legitimacy, liquidity risk, discipline, spending control, asset allocation, and crisis management.
Relevance and significance:
We have found a “moderate positive relationship”, with a correlation coefficient of 0.52, between the 2021 GSR scores and the average investment returns over the period 2015-2020, based on a sample of 60 different State-Owned Investors from all continents. In other words, those funds that do not look after proper governance, sustainability and resilience, do not generally perform very well.
Interestingly, the strongest correlation is found between the “S” component and the financial returns – i.e., increasing efforts when it comes to Sustainability, including investing in green companies, pays off in the long term. We can clearly see this effect with the “best in class” category, which includes NZ Super, Future Fund and NBIM (as sovereign wealth funds), and AP Funds, CPP and CDPQ (as public pension funds), and have all shown superior performances over the past six years. When it comes to SOIs, doing good is good for business.
SWF Response to Covid-19:
Most media covering the effects of Covid-19 on the SWF industry missed an important point: these are highly heterogeneous funds with very different mandates, restrictions, and structures, which determined how each of them could support their governments and citizenry during the economic shock. Some funds were asked for capital (withdrawals) or invited to invest in struggling domestic businesses (bailouts), while others could afford to seek investment opportunities abroad (shopping). This is best represented by the decision tree below.
At the same time, one cannot analyze whether “SWFs are investing more or less domestically” without first filtering out the funds with geographical restrictions, as follows:
Sovereign funds that, by policy, cannot invest domestically (pink box above): ADIA, GIC, KIC, NBIM, etc.
Sovereign funds that, by policy, can only invest domestically (blue box above): RDIF, SK, TSFE, TWF, etc.
If we analyze the remaining SWFs, i.e., those with a flexible mandate that can invest both at home and overseas, we observe that in the two years leading to Covid-19, they invested 22% of their capital at home; and during Covid-19, that percentage increased to 41%. The findings of this study were published by the Wall Street Journal in July 2021 (link).
New, Merged and Depleted Funds:
Those following our Global Track will notice that the number of SWFs and PPFs we cover change constantly. This is not by design or lack of rigor – on the contrary. Governments are continuously considering the establishment of new investment funds and the merger of existing ones, and our tracker changes accordingly.
In 2020, most discussions on restructuring and launching funds were stalled due to Covid-19, and we only saw three new funds (Azerbaijan’s AIH, Djibouti’s FSD, Indonesia’s INA), and the merger of two schemes (Oman’s OIA, Australia’s Aware Super). 2021 saw more activity. AIH, which is modelled after Kazakhstan’s Samruk Kazyna, started proper activity and received stakes in leading businesses including national oil company SOCAR, and three other funds were established, including Bangladesh’s BIDF, Cape Verde’s FSGIP and Rio de Janeiro’s FSERJ, which will try to be more successful than the already defunct federal fund.
In addition, superannuation funds witnessed significant consolidation (see page 31), while Omani pensions were merged into two institutions. The consolidation will continue in 2022 in both Australia and the Middle East, notably with the merger of GOSI and PPA in Saudi. We may also see new SWFs formed in Israel (Citizen’s Fund), Namibia (Welwitschia), Mozambique (FSM) and Ethiopia (EIH). Other discussions in Bahamas, Kenya, Jordan, Iraq, PNG, Romania, Sarawak, South Africa, and Suez Canal look farther away from bearing fruit.
Climate change, technology and Covid-related aid are disrupting the public finances of many countries, both emerging and developed. In December 2021, Germany’s Minister of Finance declared the redeployment of US$ 68 billion in borrowing that had already been put aside for “future investments”. At the same time, Swiss economists called for a US$ 1 trillion SWF, using capital from the Central Bank. The definition of a SWF has become blurrier, and we will be paying attention to see whether Europe adds another significant vehicle.
The exhaustion of sovereign vehicles is also a regular occurrence. In the past few years, several governments have left their savings accounts with zero balance or closed them altogether. We can distinguish:
Vehicles that are no longer fit for purpose and are replaced by other funds, e.g., Chad’s FSIST to replace FIRST (a year after set up), Ireland’s ISIF to replace NPRF, or Iran’s NDFI to replace OIF;
Stabilization funds that are exhausted but are left open in case revenues start flowing in again. This is the recent case of Peru’s FEF, Colombia’s FAEP and Mexico’s FEIP after Covid-19.
Accounts that have being mismanaged and fully drained and are permanently shut down, e.g., Uganda’s PRIR, Brazil’s FSB or Algeria’s RRF.
New and Closed Offices:
State-owned investors are increasingly sophisticated and global, and they are choosing to open office overseas to be able to hire local experts, to scout for new opportunities and to manage their holdings on the ground. London and New York continue to be the preferred locations for offices overseas, and both cities combined run almost 50 set-ups that employ over 2,000 professionals. Three SOIs have recently opened or are in the process of opening an office in the Big Apple: AustralianSuper, BCI (for the Private Equity team), and PIF.
But locations must serve a purpose, and there is an increasing number of funds looking at San Francisco for technological investments (KIC opened in 2021 and QIA may be next), at Singapore as an Asian hub (OTPP in 2020, QIA in 2021 and HOOPP may follow in 2022) and at Sydney to Australian real assets (Bouwinvest in 2019 and GIC in 2022). This year also saw Temasek opening in Brussels (for EU relations) and Shenzhen (alternative to Hong Kong), and ADQ setting foot in Cairo, in order to manage an increasing Egyptian portfolio.
Some openings are done in grand ribbon-cutting ceremonies and proudly announced in press releases. What we do not usually hear about is about offices being shut down – but there have been quite a few. Back in 2015, CIC closed in Toronto and moved to New York, and ADIA shut its low-key London office. More recently, KIA closed Beijing to move to Shanghai, Khazanah cut costs by closing its Istanbul and London offices, and QIA closed Beijing and Mumbai to move to Singapore. Some other funds suddenly stop reporting certain offices, such as CDPQ’s in Beijing, OTPP’s in New York and Temasek’s in Hong Kong and Chennai.
The presence of sovereign entities in other jurisdictions is certainly subject of debate and curiosity. For example, GIC is Temasek’s and Khazanah’s landlord at 101 California Street in San Francisco; NBIM bought the building it was renting (Queensberry House) in London in 2015, 15 years after moving into the City; CDPQ and OMERS Sydney-based professionals may be having lunch together as the offices are three floors apart; and Mubadala (via ADIC) was APG’s landlord at the Chrysler building in New York until it sold it in 2019.
New and Gone CEOs:
On December 9, 2021, Angela Rodell was sitting at her annual performance review with the Board of Trustees of the Permanent Fund in Juneau, Alaska. She should not have had many reasons to worry as she had grown the pool of capital from US$ 51 billion to US$ 81 billion since 2015, and she was highly respected among the global community – and was the world’s only female CEO of a SWF. However, she had been quite vocal against the distribution of dividends, and against the reduction in the staff’s salaries, and the Board decided to remove her at that very moment. This is not something you would expect from a country like the United States, but we must remember that all State-Owned Investors are publicly owned, and are, therefore, subject to politics.
Ms. Rodell was not the first CEO to be dismissed in 2021. In February, when Covid-19 vaccines were still not widely distributed in North America, CPP’s Mark Machin decided to fly to Dubai to get his done. This was interpreted by some as a lack of empathy and accountability and after a discussion with the Board, he decided to leave. A couple of weeks later, another highly respected leader, Turkey TVF’s CEO Zafer Sönmez, was replaced overnight by its Chairman, President Erdogan. Mr. Sönmez’s predecessor, Mehmet Bostan, had been let go in the same manner while representing the fund at their first IFSWF event in Kazakhstan in 2017.
Perhaps more concerning was the removal of Mamadou Mbaye, a Senegalese national that was leading the newly formed FSD in Djibouti; he was let go overnight due to the Board’s “lack of confidence”. Mr. Mbaye had become the first foreign CEO of a SWF in history but was in office for less than a year. Other CEOs that saw their contracts not renewed included KIC’s Choi Heenam, Khazanah’s Shahril Ridza, and KIA’s Farouk Bastaki.
Other changes in leadership seemed to be more natural and anticipated. However, these 20 funds are amongst the Top 100 largest in the world, and 20% is a very high churn rate. During 2020 and 2021, these organizations were highly disrupted by external factors, and changing their leader may have not been the best idea from a business continuity management perspective. We do hope that this ratio decreases in 2022.
Last year at this time, we issued our first edition of the State-Owned Investors 2030, forecasting that the industry would reach US$ 50 trillion in AuM by then. However, we were not expecting the stock rally and subsequent growth in AuM that followed and funds now are in a very different position than last year. Our new “crystal ball” figure is US$ 53.7 trillion by 2030.
This figure is based on individual projections for all the major funds. Some of them including NBIM, PIF, APG, GPIF, NPS and CPP have been bold enough to project their balance sheets to 2025, 2030, 2050 and beyond (GPIF is expecting to peak at US$ 4.6 trillion in year 2074). For the rest, we have relied on the average growth between 2016-2021 when we believed they made sense, or our estimates otherwise.
We are expecting SWFs to grow from the current US$ 10.5 trillion, to US$ 13.2 trillion by 2025, and US$ 17.7 trillion by 2030. This will be growth in AuM but also new funds that may arise out of excess or need of capital. Public pension funds, on the other hand, will keep benefiting from consolidation and increasing contributions, and we expect them, to grow from today’s US$ 21.4 trillion, to US$ 26.6 trillion by 2025, and to US$ 36.0 trillion by 2030. We foresee that there will be at least 500 SOIs by 2030 and some of them, if established, may become very significant and can also contribute to the growth of the industry
Just like we did last year, we have paid closed attention to the latest forecasts from the IMF, issued in October 2021. The significant current account balances expected of Germany (US$ 2 trillion), Japan (US$ 1.1 trillion), Taiwan (US$ 0.7 trillion) and Switzerland (US$ 0.4 trillion) during the period 2021-2026, make us think that these territories could consider the establishment of their own future generations fund.
Last year we also predicted that we would see several new offices overseas, especially in Southeast Asia and in Australia. Indeed, QIA opened in Singapore and GIC announced a new set-up in Sydney. We also expected funds like BCI to open an office outside of Victoria – which they will do in New York very soon.
But let’s not keep scores. We talked often with the funds’ C-suite this year and there seems to be a common message: SOIs are bullish on private markets, especially on private equity and infrastructure. We also expect private credit and venture capital to gain a more significant allocation over the next few years.
As we move past the pandemic, strategic funds will move from “forced investments” to “opportunistic investments”, so we may see a recalibration of the balance between domestic and foreign investments. In any case, we believe domestic mandates are here to stay and most of the funds that will join the universe of SWFs will have an important role at home. This will only contribute to the blurrier line between owners and managers.
Geopolitics will continue to play an important role in SOIs’ activities. According to the WB and IMF projections, four of the top five world economies will be Asian by 2024: China, India, Japan and Indonesia. The tensions between US and China will only escalate, and the EU will continue to fight its internal demons, this time without Chancellor Merkel. The world economy was expected to grow 5.9% in 2021, and 4.9% in 2022.
Technology will continue to disrupt the investing world. Venture Capital will only gain importance and a fundamental part in SOIs’ portfolios. And so will healthcare, given the changes in demographics and fight against epidemics. We expect these two industries to continue to be favored over real estate, especially offices.
If there was any doubt last year, ESG has confirmed that is here to stay. The unparalleled level of green investments we have seen this year in both public and private markets, as well as the number of commitments pursued by SWFs and PPFs this year, paint a more positive picture than 12 months ago. Yet, there is much more work to do and will funds must continue shaping their governance framework, investment strategies and internal teams around ESG-related issues in the years to come. NBIM completed its first investment in unlisted renewable energy infrastructure in 2021 and has the potential of deploying tens of billions of dollars more in European wind and solar farms within the next few years. Others may follow suit. Additionally, we expect several state-owned investors to be underway towards the goal of running carbon-neutral portfolios by 2030.
As highlighted by our GSR Scoreboard in mid-year though, it is not only sustainability that must be tackled but also governance, and, especially, resilience. In 2021, we watched a few funds getting exhausted, and several CEOs being replaced. We expect the changes in investment strategy to make SOIs more focused on risk factors and more agile to market events – key considerations to be upgraded to State-Owned Investors 3.0.
Ranking of Sovereign Wealth Funds:
|32||NZ Super Fund||NZ||2001||41|
|36||New Mexico SIC||US||1958||35|
|68||KWAN / NTF||MY||1988||4|
Ranking of Public Pension Funds:
Global SWF studies 436 State-Owned Investors (“SOIs”), including Sovereign Wealth Funds (“SWFs”) and Public Pension Funds (“PPFs”), which jointly manage US$ 32 trillion in assets. SOIs are no longer defined simply as government-owned vehicles investing their capital overseas. Today the industry is highly complex, with mixed forms of legal structure, ownership and portfolios, and we define four major groups of SOIs:
SWF-Stabilization Funds: this is the smallest group and yet the most intuitive. They are defined as “rainy-day funds” because they are established as a buffer mechanism that can cover fiscal deficits in times of uncertainty. For this reason, they are usually highly liquid funds that allocate on average 90% of their capital into stocks and bonds. Examples include Azerbaijan’s SOFAZ, Botswana’s Pula Fund and Chile’s ESSF.
SWF-Savings Funds: also known as future generations funds, they face less pressure for short-term liquidity and can afford to invest more aggressively. They allocate an average of 22% to private markets, and with a combined AuM of US$ 5+ trillion, they represent some of the largest investors in real estate, infrastructure and private equity. Examples include Abu Dhabi’s ADIA, Norway’s NBIM and Singapore’s GIC.
SWF-Strategic Funds: these have been the most popular choice among governments in the past decade, as they combine a financial goal with an economic mission, contributing to the domestic development. For this reason, some of them are set up without much “wealth” and seek to catalyze foreign capital and fundraise from other SOIs instead. Examples include Ireland’s ISIF, Malaysia’s Khazanah and Russia’s RDIF.
Public Pension Funds (PPFs): PPFs have gained in significance and activity to such an extent that they are today similar in behavior to SWFs, despite the obvious differences in liability profile. Both groups keep similar strategies and asset allocations and can be seen competing for the same stakes in public auctions and private placements around the world. Examples include Canada’s CPP, Japan’s GPIF and Netherlands’ APG.
We are flexible in our definitions, which are driven by market interest. If we are too academic, e.g., using IMF’s definition of SWF, we risk leaving out some of the funds that we deem highly interesting, acquisitive and comparable to other SOIs, including India’s NIIF, Morocco’s Ithmar Capital or Singapore’s Temasek.
We also include certain Central Banks (“CBs”), for the portion that is investable, including China’s SAFE (Investment Company), Hong Kong’s HKMA (Exchange Fund), and Kazakhstan’s NBK (including NOF and NIC). We stopped covering SAMA when it changed name to SCB and adopted a less “SWF-like” strategy.
We must bear in mind that certain funds are asset managers that invest on behalf of asset owners, e.g., Australia’s TCorp manages a SWF (NGF) and several superannuation pools; Canada’s AIMCo manages a SWF (AHSTF) and different pension plans, and Netherlands’ APG invests on behalf of ABP and other pools.
Out of the 436 SOIs, we define a Top 200 list, which can be found in Appendix 1 and allows us to focus our efforts on the 100 most active SWFs and the 100 most active PPFs. This sample serves us as a fair representation of the heterogenous SOI universe. We have doubled our coverage in less than a year.
All the data is proprietary and comes from public sources or estimated based on our knowledge and insights. Of the Top 200, only 10 funds do not report their AuM, including Abu Dhabi’s ADIA, Qatar’s QIA and Singapore’s GIC, and we maintain internal models to estimate the size based on allocation and investments.
As a policy, we do not like “n.a.” and always estimate figures based on our experience, if undeclared. We maintain a dynamic list of the funds’ allocations as well as an exhaustive list of investments and divestments – a proprietary data set that goes back to the birth of the funds. Unless indicated otherwise, our investment data refers to private markets and to certain public market activities that are sizable and long-term in nature.
Lastly, we are contemporaneous in our approach and report information the minute it happens. The present report, released on January 1, 2022, and collecting activity up to December 31, 2021, serves as a proof.
Global SWF is a financial boutique that was launched in July 2018 to address a perceived lack of thorough coverage of State-Owned Investors (SOIs), including SWFs and PPFs, and to promote a better understanding of, and connectivity into and between global investors. The company leverages unique insights and connections built over the years and functions as a one-stop shop for some of the most common SOI-related services, including:
Consulting Services, helping governments establish or reformulate their investment and strategic funds.
Data Services, running the the most comprehensive platform on SOIs' strategies, portfolios and executives.
We firmly believe in the global aspect of our business and have teams, advisors and partners in New York, Boston, Miami, London, Birmingham, Frankfurt, Lagos, Abu Dhabi, Dubai, Singapore, Hong Kong, Beijing, and Melbourne.