Sovereign Wealth Funds: Coping with Increased Complexity and Asset Growth

Eagle’s Amit Bharakda examines the reasons why SWFs are putting a greater emphasis on control and transparency when it comes to managing and measuring the performance of their investments.

Amit Bharakda, Regional Head of Business Development, EMEA

The investment landscape for the world’s sovereign wealth funds (SWFs) has changed dramatically in recent years, as assets under management (AUM) have continued to grow steadily. As assets have grown, many have looked to diversify into new asset classes and build their own investment capabilities in-house. At the same time, stakeholder demands have changed, with greater scrutiny on the performance of these funds by governments and civil servants.

At Eagle, we’re seeing these factors converge as SWFs put a greater emphasis on control and transparency when it comes to managing and reporting on their investment data. Many of the SWFs we work with are looking to develop an Investment Books of Record (IBOR) to achieve a single consolidated version of the truth across all their investments. They are also looking to enhance their performance measurement capabilities as they seek to inform investment decision-making and better understand the drivers of investment performance.

Growing AUM, combined with a low interest rate environment and enhanced sophistication and institutional know-how, has led many SWFs to look beyond their traditional investment focus areas of fixed income and public equities, expanding their investment scope into new regions, sectors and asset classes. According to research by PwC, the proportion of assets allocated to alternatives such as infrastructure, real estate and private equity by SWFs increased from 19% to 23% between 2010 and 2016. In dollar terms, that’s more than double – from $836bn to $1.7tn. Private equity investments, for example, are now commonplace with 61% of SWFs holding the asset class in their portfolios. In January 2018, Norway’s oil fund, the world’s largest sovereign wealth fund with $1.1tn in assets, announced it may start investing in private equity in what would be a major strategic shift – highlighting the asset class’ growing prevalence.

This diversification presents a number of challenges for SWFs to contend with. Beyond the need to bring together data from multiple sources, there is a consolidation challenge in accounting for, and analysing the performance of, these different instruments. Take private equity for instance; performance is measured in a completely different way to publicly listed equities, over different time horizons and with different associated risks. When reporting performance at a strategic level, SWFs need to be able to accommodate these different instruments and present a consolidated overview of performance both for reporting and to support future allocation and investment decisions.

Furthermore, with asset classes such as real estate and private equity, as SWFs have gained sector expertise and developed their capabilities, they are increasingly anticipated to make direct investments themselves. We’re already seeing this – for example the Abu Dhabi Investment Authority (ADIA) announced in its most recent annual review that it is looking for direct investment opportunities in private equity and alternative investments – but it is a trend that is likely to accelerate as their experience grows and they become more comfortable with these vehicles, driven by the potential to make greater returns through managing their own investments. To further build out these capabilities, they will need the supporting data management, accounting and performance measurement systems in place, both to manage their assets and to inform their decision-making.

SWFs face greater transparency requirements as investment committees look to understand the drivers of performance across their different investments. As asset pools grow, there is also a growing demand for greater oversight by stakeholders within governmental institutions. To meet these demands, centralised control over investment performance data and analysis is critical. Risk monitoring and risk management are playing an increasingly important role in the investment decision-making process, particularly with the wider asset allocation.

As a result, managers of sovereign wealth portfolios have increasingly sophisticated reporting and accounting requirements. While manual workarounds are still commonplace when it comes to accounting and performance measurement, these are becoming increasingly unsustainable as assets grow and allocations become more diverse. Having a single version of the truth across all holdings, with the ability to drill down to a granular level of detail is moving from ‘nice to have’ to ‘must have’ for management teams at many SWFs.

Against a backdrop of increasing sophistication in investment capabilities, the growing prominence of alternative asset classes within portfolios and heightened transparency requirements, the need for SWFs to have access to consolidated investment data has never been greater. At Eagle, we are seeing more and more asset owners across the board investing in their accounting and performance measurement capabilities, to assume greater control and oversight of their investments; SWFs are no exception.

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