Sovereign wealth funds (SWFs) in the Middle East are looking to invest actively in an effort to generate better returns for their shareholders, according to a new study by auditing and consulting firm KPMG.
The report also found that there has been a shift in the last two years on how SWFs allocate their assets.
“While the majority of SWFs continue to deploy their funds in bonds and global equities, a relatively low interest rate environment, continually evolving investment strategies and a growing appetite for alternative asset classes are resulting in a shift away from what has typically been a passive investment philosophy,” said Vikas Papriwal, KPMG partner and head of markets.
“The areas of direct investments for SWFs are generally few and chosen with the majority concentrating on infrastructure, real estate and increasingly, private equity.”
KPMG also noted that the region’s SWFs are taking advantage of their scale and long-term investment strategies to allocate more of their assets to sectors such as hospitality, industry, logistics and retail. The SWFs also continued to pour in capital to fund infrastructure, where yields are higher, the report said.
Although stalwarts Abu Dhabi Investment Authority (ADIA) and Kuwait Investment Authority have been investing in property since mid-1970s, there has also been a marked rise in brick and mortar investments by the region’s wealth funds.
In addition, the Middle East SWFs are increasingly shifting away from European markets due to the economic conditions there and have redirected a portion of funds to the Middle East market.
In a turnaround investment strategy, the wealth funds have began targeting emerging markets like Africa and China.
“UAE is home to one of the largest SWFs in the world, and recently has played a significant role in establishing relations with African countries, resulting in commitments worth $19 billion from UAE investors, across 17 infrastructure projects,” said Ashish Dave, KPMG partner and head of PE and SWFs.
“This paves the way for future investments as economic linkages between the UAE and Africa continue to strengthen, in part driven by the investment strategies of local SWFs.”
Meanwhile, Qatar Investment Authority, which has the largest number of assets in Europe, is also looking to diversify its portfolio with more investments in Asia.
In November 2014, QIA’s chief executive Ahmed Al Sayed said that the fund is looking to invest between $15 billion and $20 billion over the next five years in Asia. He specifically noted that China’s property, infrastructure and healthcare sectors are of interest to the QIA for future investments.
“Looking forward, 2015 is set to be an active year for SWFs in the region,” said Dave.
Global SWFs currently control an aggregate of approximately $5 trillion in assets under management (AUM), the report said.
Of this amount, the SWFs in the GCC (most notably ADIA, currently the world’s third largest SWF as per KPMG’s estimations) account for approximately 40 per cent of global SWFs by AUM.