Study: Sovereign funds to increase co-investments

Sovereign wealth funds will demand more co-investment opportunities in the future, according to more than half of those polled for a recent survey.

Almost 41 percent of respondents not affiliated with sovereign wealth funds said they expect such co-investments to take the form of direct co-investments on deals, while 13 percent believe the funds were more likely to take ownership stakes in established private equity managers.

The poll, conducted in March and April by law firm Norton Rose and the Emerging Markets Private Equity Association, comes months after a period in which sovereign wealth funds purchased equity stakes in several major private equity firms.

Last autumn, the Abu Dhabi-sponsored Mubadala Development Company took minority stakes in The Carlyle Group and Apollo Management Company. In December, the China Investment Corporation purchased a $3 billion equity stake in The Blackstone Group.

The survey also identified several attributes that made sovereign wealth funds attractive limited partners.

Nearly 72 percent of respondents said that a lack of exit pressure and a long-term investment strategy comprise one of the most appealing differentiators between a sovereign wealth fund’s approach to private equity and some traditional limited partners. A sovereign wealth fund’s typically expansive capital resources were identified as the second greatest source of appeal.

On the topic of transparency, an issue that has bedeviled both the sovereign wealth and private equity communities, more than 80 percent of respondents said they believe there was a need for more information disclosure from sovereign wealth managers. Despite that consensus, there was considerable variation as to how exactly the goal of increased transparency was to be met.

Roughly 49 percent of respondents said that a voluntary code of conduct, akin to the Walker Report guidelines for UK private equity firms, would be the best practice. Thirty-three percent said that a formal system enforceable by law is a necessary measure.

The survey polled 113 sovereign wealth, private equity and other financial professionals.