Sovereign investors rapidly increase exposure to private credit

By Daniel Lanyon on Monday 9 July 2018

Editor's PickAlternative Lending

A study by Invesco suggests while equities remain the favoured asset class for sovereign investors, a shift to alternatives is set to intensify.

Allocations to private markets by sovereign wealth fund investors has doubled over the past five years to 20 per cent, with private credit most favoured in 2018, according to a recent survey by Invesco.

The data in the sixth Invesco Global Sovereign Asset Management Study show equities remain at the core of sovereign investors’ portfolios, appearing to have now overtaken bonds to become the lead asset class for sovereigns. Now, however, with a host of macroeconomic concerns and a mature equity bull run sovereigns are increasingly keen on private assets.

According to the study, average allocation to equities have increased to 33 per cent from 29 per cent in 2017. The increase in equity allocations has been driven by a number of factors, including the equity bull market. As a result, nearly half of sovereign investors are now incrementally or materially overweight in equities and more than a third (35 per cent) plan to reduce equity weightings over the medium term.

Alex Millar, Head of EMEA Sovereigns & Head of UK institutional Business at Invesco, says private markets are increasinlgy favoured by many sovereign investors thanks to the long term and illiquid nature of many asset classes within this market.

“Good opportunities are seen in infrastructure and in private credit, but respondents are seeing fewer attractive opportunities in private equity because of increased competition for assets and bidding up of prices,” he said.

“Despite these concerns, most sovereigns will continue to allocate to private markets, focusing on opportunities in new regions instead of the traditional home bias.

 Both North America and EMEA are strongly favoured for private credit, with 83 per cent of sovereign investors highlighting these regions as attractive.

The average allocation to alternatives has doubled in the past five years, reaching an all-time high of 20 per cent in 2017, as sovereigns increasingly realise a broader set of benefits being introduced to their portfolios.

This year’s study included 26 individual sovereign investors and central bank reserve managers across the globe representing $17trn of assets, of which 62 are central banks compared to 35 in 2017.  

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