Sovereign wealth funds boost private investments in emerging markets

By Olzhas Auyezov

ASTANA (Reuters) - Private market investments have become a crucial part of sovereign wealth funds' (SWF) portfolios, helping them better tap the potential of key emerging markets such as China and India, a Goldman Sachs Asset Management executive said.

Global sovereign wealth funds have been increasing their spending on alternative investments such as private equity over the last few years, in part due to lower returns on other asset classes, especially bonds.

Sheila Patel, chief executive for international business at Goldman Sachs Asset Management -- whose clients include SWFs, said such investments were particularly important in leading emerging markets where there are fewer listed companies than in developed economies.

"A key point of discussion at this conference and a key opportunity but also a challenge is investing in long-term assets, which include private assets, private equity, private credit," Patel told Reuters at a SWF conference in Kazakhstan.

"Given the focus and the importance of getting the emerging markets right, such as China and India, private markets play a critical role of investing in the overall strategy in these markets," Patel said in the interview.

With some $6.5 trillion in assets, sovereign investors already account for 19 percent of capital committed to private equity. By the end of 2016, 61 percent of SWFs had allocations to private equity, a record high, and 63 percent to real estate.

One of the world's largest SWFs, the Abu Dhabi Investment Authority (ADIA), said in July it was looking for direct investment opportunities in private equity and alternative investments after returns slowed last year.

U.S. POLICY CONCERNS

Patel said SWFs had the flexibility to complement or avoid index investing in markets such as China and India, dominated by state-owned companies and traditional sectors such as energy and telecoms.

"So we see quite a bit of activity from clients in both the public, listed, active and liquid markets like in China and India and emerging markets overall as well as in the private markets," she said.

Meanwhile, Patel said clients were concerned about growing protectionism in the United States and the debate about the government's debt ceiling.

"The debt ceiling's linkage to other issues will be what clients are watching," she said, adding that investors were concerned U.S. equity market valuations "are a bit stretched".

"Right now, you've seen quite a bit of strength in the U.S. equity markets so far this year.

"A lot of that is predicated on some of these changes, whether it's tax reform, the focus that everyone expected on infrastructure, some of the opportunities around that, and unfortunately none of those have had much progress yet."

(Editing by Helen Popper)