Sovereign wealth funds are betting on more technology and green energy

Sovereign wealth funds are adjusting their allocation focus to account for higher interest rates and inflation, as well as demand for more climate-sensitive investments.

“Inflationary pressures are being driven by reflationary fiscal and monetary policies, national industrial strategies to transform supply chains, and broad-based public investment to combat climate change through mitigation and adaptation actions,” according to the annual report of the International Forum of Sovereign Wealth Funds.

The report said state investment organizations are trying to diversify their investments in a “more uncertain environment with higher interest rates.”

They are moving away from more volatile, cyclical sectors like consumer goods and software, which they have favored for the past five years, toward more capital-intensive industries. As IFSWF wrote for long-term investors, these funds “have a competitive advantage over short-term asset allocators.”

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As of 2022, SWFs accounted for 38.9% of total assets of the world’s 100 largest asset owners, up from 32% a year earlier, according to research by the WTW Thinking Ahead Institute.

Sectors. Funds have moved beyond an emphasis on software and services technology to invest in artificial intelligence, semiconductors and hardware, as well as renewable energy infrastructure, according to the IFSWF report.

For example, Mubadala Investment Co., one SWF in the UAE, co-invested with funds advised by private equity firm KKR in the acquisition of CoolIT Systems. The Canadian company, operating in North America and China, specializes in liquid cooling systems for the most demanding computing environments in the world, such as data centers.

The US Inflation Reduction Act of 2022 and the EU’s Green Deal Industrial Plan and Net Zero Industry Act aim to strengthen greener economies through subsidies and tax incentives. Over the past few years, this legislation has led to 27 SWF deals totaling $3.2 billion for industrial investments in green hydrogen and sustainable aviation fuels. In 2023, the European framework led to SWF financing of 25 transactions compared to just three in 2022.

One of SWF’s recent notable actions: The Qatar Investment Authority, Singapore’s Temasek Holdings and venture capital firm Decarbonization Partners jointly led a $542 million capital raise for Ascend Elements, a US manufacturer of electric vehicle battery materials.

Property. According to the report, real estate is a key element of SWF’s portfolio and accounts for one fifth of their direct investments. Last year, their real estate investments grew by almost 50% to $14.8 billion, mainly driven by new purchases, the most since 2018. They have fallen in recent years due to high valuations, which has encouraged funds to allocate more of their capital elsewhere. However, the current high interest rates have cooled prices and SWFs are interested again. As the report notes, SWFs see real estate’s “potential to stimulate economic growth while providing a hedge against inflation.”

The report said: “The strong rebound in hotel and resort investment following the pandemic highlights the key role of sovereign wealth funds in supporting large-scale infrastructure projects aimed at economic diversification and growth in their home markets.” For example, Saudi Arabia’s Public Investment Fund is financing Neom, a new megacity on the Red Sea coast, with $1.5 trillion.

Venture capital. One area that has suffered in recent years is VC, a trend that goes far beyond sovereign wealth funds. High interest rates and a slowdown in initial public offerings, which provide VC investors with big payouts, are to blame. In 2023, SWFs participated in only 31 venture capital fundraising rounds, compared to 97 in 2022.

The main exception was Singapore-based GIC and Temasek’s participation in a $6.5 billion VC fundraising round for U.S. e-commerce payment processor Stripe Inc. ahead of its IPO. “This investment shows how opportunistic the approach of sovereign wealth funds to investing in startups in 2023 has been,” the report noted. Adding to the appeal is the fact that Stripe’s valuation has dropped.