Middle East sovereign investors have focused on increasing allocations to infrastructure and private equity over the last two years; however attitudes have changed in 2016, and for the first time fewer sovereign investors expect to increase allocations to these asset classes. While allocations to infrastructure and private equity have increased over the last three years, total allocations remain low. From 2013 to 2015, Middle East sovereign investors’ average total portfolio assets to infrastructure increased from 0.3% to 2.5%, whilst private equity rose from 5.2% to 5.5% of the Middle East average sovereign portfolio5.
Conversely, their allocations to real estate have risen significantly, from 5.9% in 2013 to 9.8% in 2015. Global sovereign investors expect to increase global and local allocations into real estate more than any other asset class in order to meet diversification and absolute return objectives.
Sovereign investors globally attribute this largely to real estate investments carrying fewer execution challenges6 than private equity and infrastructure, where sovereigns have encountered difficulties in deploying their assets. Investors also cite a greater number of credible global asset managers, and a long list of developers and operators, to partner with in real estate investments. As a result, more than 63% of Middle East sovereign investors are underweight infrastructure and 50% underweight private equity, relative to their target allocations7.
Alex Millar concluded: “While the challenges facing sovereign investors since the start of this period of oil price volatility have clearly not gone unnoticed, and returns have been affected, confidence among global sovereign investors is relatively high. Within Invesco’s sovereign investor profiles this confidence is most noticeable amongst Liability and Development sovereigns, while Investment and Liquidity sovereigns have faced greater challenges due to the importance of commodities to their new funding. This year’s study reinforces the view that sovereign investors are better prepared to cope with volatility and funding challenges, and continue seeking strategic asset allocation opportunities, building in-house capabilities, and exploring expert investment partners in order to structure their portfolios towards securing diversified returns for the long-term.”