Middle Eastern SWFs allocate 23% of capital for alternatives: PwC

Middle Eastern sovereign wealth funds (SWFs) currently allocate 23 percent of their assets under management (AUMs) for alternative investments, including private equity, real estate, gold and infrastructure, PwC said in a new report.

Since 2014, SWFs have been forced to broaden their investment strategies amid economic challenges as asset growth began to stall amid falling oil prices.

AUMs are expected to see increasing growth in the coming years as SWFs invest in non-fossil sources and diversify their portfolios to include alternatives and boost returns.

“Middle East SWFs, in general, have been following the global trend by allocating more capital towards alternatives. Over the five-year period their average allocation to the alternatives asset class has increased from 3.7 percent to 6.1 percent of total assets, while their average target allocation rose from 6.5 percent to 8.6 percent,” said, Laurent Depolla, PwC Middle East Sovereign Investment Funds leader.

European infrastructure deals are also attractive for SWFs in the Middle East, as they are “possibly looking to deploy capital at even lower preferred rates of return”, PwC added, citing Preqin, a leading data provider for the alternative assets industry.

Meanwhile, potential risks could arise from investment in alternatives, as the majority of alternative asset classes are highly illiquid, except for gold, which has one of the highest rates of daily trading volumes and cushion investors against short and medium term market corrections.

Alternatives are projected to be prominent in SWF portfolios going forward, as they can offer increased diversification, principal protection, a hedge against inflation, and better portfolio performance, said Will Jackson-Moore, PwC’s global head of sovereign investment funds and private equity. 

“Overall though, the benefits seem to outweigh the costs, as the varied nature of alternatives provides SWFs with the ability to select an asset class specific to their investment needs,” Jackson-Moore added.

Total AUMs grew to $7.4 trillion in 2016, while SWFs allocation to fixed income products has dropped to 30 percent in 2016 from a peak of 40 percent in 2013.