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Inflation pushing sovereign investors to private markets

Sovereign-wealth-fundsThe majority of sovereign investors have repositioned their portfolios as inflation concerns continue, with private markets benefitting the most from the reallocation.

According to Invesco’s latest Global Sovereign Asset Management Study, 59% of sovereign investors are actively pursuing private markets as a result of inflation.

The survey found wealth funds are reassessing their asset allocation in anticipation of further rate rises with private assets constituting 22% of sovereign wealth fund portfolios on average.

This is the highest proportion on record, with sovereign wealth funds now owning $719 billion in private assets, substantially up from $205 billion in 2011.

Meanwhile, total AUM in sovereign wealth funds totalled $10.5 trillion in 2021, up from $8 trillion in 2018.

Invesco’s study also found that real estate, private equity and infrastructure are proving popular private market alternatives with 71% of respondents agreeing they were effective inflation hedges.

Regarding regions, sovereign investors are looking to decrease exposure in Europe and Emerging Europe, while 33% expect to increase exposure in North America and 23% in Asia Pacific.

Rod Ringrow, head of official institutions at Invesco, commented: “‘Uncertainty’ has been the word dominating investors’ conversations so far this year. After a relatively predictable few years, consensus over the direction of the global economy has broken down. This, paired with the potential end of a multi-decade bull run in fixed income markets, is creating a new backdrop for sovereigns.

“While many are looking to private markets for solutions, we should not overstate the pace of this shift. As long-term investors, sovereigns are treading very carefully, and many are making only incremental changes to their portfolios, adopting a ‘wait and see’ approach.”

The study surveyed 139 chief investment officers, head of asset classes and senior portfolio strategists at 81 sovereign banks and 58 central banks with a total of $23 trillion in assets under management.

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