Abu Dhabi’s giant sovereign wealth fund increased its exposure to direct private equity investments last year as returns slowed across its portfolio, FN’s sister publication Private Equity News reports.
Adia—the Abu Dhabi Investment Authority, which has an estimated $828bn under management, according to the Sovereign Wealth Fund Institute—has been one of the biggest backers of private equity funds, targeting an allocation of up to 8% of its assets. But the prospect of lower returns has led it to rethink its strategy and increase its exposure to direct buyout deals.
“The latest available data on the department’s returns suggest a solid performance for private equity investments in 2016,” Adia said in its annual review. “However, a combination of high valuations, increasing competition and rising interest rates in the US may have a dampening effect on future absolute returns for the industry.”
“There was continued momentum towards increasing our exposure to direct private-equity transactions, alongside our partners,” the fund added.
Going direct, either by doing deals outright or co-investing alongside a private equity firm, can allow well-resourced investors to turbocharge returns by reducing the fees paid to buyout managers.
With companies changing hands at record valuations in the US and Europe, Adia added that it is also casting its geographical net wider by seeking more deals in rising markets, particularly India and China.
Across its portfolio, Adia said its annualised rate of return over the last 20 years sank to 6.1% in 2016 from 6.5% in 2015. Over a 30-year timespan, annualised returns fell to 6.9% from 7.5%. Still, Adia said returns “remain consistent with historical levels”.
Sovereign wealth funds around the world are coming under pressure to generate returns in an ultra-low interest rate environment. This, coupled with a fall in the price of oil—the source of many such funds’ enormous wealth—has seen sovereign wealth funds change the way they do business.
In March, Norway’s $956bn government pension fund said it would consider making private equity investments for the first time. The conservative institution is currently restricted to stocks, bonds and real estate.
Another Abu Dhabi sovereign wealth fund, Mubadala Development Co., announced earlier this year that it was seeking to raise a fund for leveraged buyouts. The fund, which has $67.6bn, is investing the money on behalf of Ardian, one of Europe’s biggest private equity firms.
Increased direct investment by sovereign wealth funds will only add to the competition buyout firms face for assets.
Unlike private equity firms who are typically required to sell assets after five years of ownership, sovereign wealth funds’ longer time horizons allow them to pay higher prices.
The competition for deals from such new entrants—as well as public companies which have long come up against private equity bidders in auctions—means buyout firms are struggling to spend money as fast as they can raise it. Adia’s report estimates that for the seventh consecutive year, the value of buyout-backed exits exceeded that of new investments.
But the increasing prominence of such funds is not all bad for private equity managers. Sovereign wealth funds have proven willing buyers of portfolio companies. In the last week alone, Singapore’s sovereign wealth fund has bought minority stakes in two private equity backed companies, financial publisher Mergermarket Group and Norwegian software company Visma Group.
BC Partners doubled its money by selling its minority stake in Mergermarket, while KKR more than trebled its money when it sold its 70% holding in Visma to a consortium of investors including GIC, Europe’s largest ever software buyout, PEN reported.