Here’s why some sovereign wealth funds could outperform despite the coronavirus crisis

A new report looking at sovereign wealth funds’ investment activity in 2019, carried out by the International Forum of Sovereign Wealth Funds (IFSWF), showed that the number of publicly disclosed direct investments made by such funds has stagnated since 2017.

The amount of equity invested has dropped by over a third from $54.3 billion in 2017 to $35 billion in 2019.

The ISFSWF is a network of sovereign wealth funds from almost 40 countries.

Sovereign wealth fund investments have fallen in the last few years and way before the coronavirus crisis hit, according to a new report, but some are thought to be well-positioned for the economic impact of the pandemic.

A new report looking at sovereign wealth funds’ investment activity in 2019, carried out by the International Forum of Sovereign Wealth Funds (IFSWF), a network of sovereign wealth funds from almost 40 countries, showed that the number of publicly disclosed direct investments made by such funds has stagnated since 2017, while the amount of equity invested has dropped by over one-third to $35 billion in 2019, down from $54.3 billion in 2017.

“Sovereign wealth funds, as long-term investors looking for value, have really struggled, particularly in private markets in taking direct stakes, in 2019 and even beginning of 2020. High valuations in the private equity markets, increasingly illiquid stock markets and a really difficult IPO (initial public offering) environment last year made it difficult for them to double down on their investments, so we did see a slowing of direct investments last year and that was before Covid hit,” Victoria Barbary, director of strategy and communications, International Forum of Sovereign Wealth Funds, told CNBC Tuesday.

The report also highlighted that the challenging investment climate prompted sovereign wealth funds to look for opportunities in sectors such as enterprise software and services and biotechnology, which have proved more resilient to the Covid-19 crisis, “while their interest in sectors such as industrials and financial services, that have been hard-hit by the crisis, waned.”  

The coronavirus, which was first detected in Wuhan, China late last year, has brought large swathes of global economic activity to a standstill amid lockdowns to stop the spread of the virus.

Stock markets initially plummeted as the virus took hold, but massive central bank stimulus packages have given a big boost to investors and markets have regained lost ground.  On Monday, for example, the S&P 500 index returned to positive territory for 2020 as fears over the coronavirus gave way to positive momentum surrounding the reopening of the American economy.

What’s more, some of the investments made recently by certain sovereign wealth funds — state-owned investment vehicles that  use surplus revenue (such as money made from a nation’s oil and gas reserves) to invest in a variety of assets, usually on a long-term basis — have been shrewd and resilient investments during, and due to, the pandemic.

“A lot of sovereign wealth funds have been, and we continue to see this this year, have been investing in sectors like biotechnology, like software and digital services, that have actually done comparatively very well during this period,” Barbary told CNBC’s “Squawk Box Europe.”

“Obviously looking for vaccines, with biotech, and all of these technologies that enable me to talkl to you from home, that enable us to work from home, have also done relatively well and those were things that sovereign wealth funds were doing quite a lot of investment in, in 2019.”

For example, the report highlighted that $3 billion of sovereign wealth fund investment had gone into software and digital services, up from $2 billion the previous year; “We would expect to see those funds that have really looked at these segments to do pretty well,” she said.

More sovereign wealth funds were looking at companies and assets where they see value over time, “they are looking at stronger IP (intellectual property) rather than this consumer e-commerce that we saw five years ago,” Barbary said

The IWSWF report continued on that note that “high valuations for mature private companies have encouraged those sovereign wealth funds with established private-equity programmes to look for earlier-stage investments, since 2017 particularly, in sectors like healthcare and technology, where more companies are looking for capital and sovereign wealth funds perceive there may be more value.”

“Naturally, as sovereign wealth funds invest at the earlier stage of companies’ lifecycle, they have to reduce the size of cheque they write, reducing the average investment value we have recorded. Equally, high valuations in private markets has also encouraged some sovereign wealth funds to sell investments in assets such as core real estate in major cities and infrastructure, believing the prices of some assets had peaked.”