Investing at scale

Investing at scale

Sovereigns continue to seek alpha in real estate and infrastructure, but now also private market opportunities in specialised areas such as China and the technology sector; while a more subdued return environment presents challenges for large-scale sovereigns, they are better positioned to assess and access new opportunities than smaller peers.

Scale

In our second theme we find sovereigns adapting to increasing scale. While size facilitates opportunities, CIOs of large-scale funds are grappling with opposing challenges and constraints stemming from larger scale.

A key challenge for large-scale funds (>$100bn in assets) is capacity. With demand for private markets assets rising faster than supply, large-scale sovereigns consume much of the available deal flow.   Large sovereigns are also responding by seeking alpha in specialised areas including China and the technology sector. They are better positioned to assess and access new opportunities than their smaller peers (Figure 3), establishing leading internal capability to assess, source and move quickly on these new opportunities.

Figure 3. Asset allocation, Sovereigns only (% AUM)

Figure 3. Asset allocation, Sovereigns only (% AUM) Figure 3. Asset allocation, Sovereigns only (% AUM)

Sample size: 53.

Large-scale sovereigns have been relatively effective in meeting their targeted strategic asset allocations to private markets. However, sovereigns in the middle of the size spectrum lacking established partnerships, experience of sourcing deals directly, and the internal capability of their larger peers can find themselves caught in the middle: too large or no longer wishing to use the co-mingled pools, but too small to make use of these more sophisticated private market strategies available to large sovereigns. Consequently, many find themselves significantly under-weight (Figure 4 (a-c)).

Figure 4a. Actual vs strategic asset allocation by size, Sovereigns only (% citations)

Figure 4a. Actual vs strategic asset allocation by size, Sovereigns only (% citations) Figure 4a. Actual vs strategic asset allocation by size, Sovereigns only (% citations)

Fig 4b.

Fig 4b. Fig 4b.

Fig 4c.

Fig 4c. Fig 4c.

Sample size: 59.

Combined with a more subdued return environment going forward, this has led funds to fork-in-the road decisions about whether to diversify and accept lower risk adjusted returns or become more concentrated and accept higher idiosyncratic risks.