By Peter Alagos
Sovereign Wealth Funds (SWFs) play a vital role in providing small and medium-sized enterprises (SMEs) improved access to risk capital, which could help contribute to job generation and sustained growth, a World Bank official said.
Michel Noel, manager, Non-Bank Financial Institutions of the World Bank, made the statement during a special luncheon address at the 6th Annual Meeting of the International Forum of Sovereign Wealth Funds (IFSWF) held yesterday at the Ritz-Carlton Doha.
“Building on their experience in investing in private equity in more advanced economies, we believe that SWFs can progressively enrich experience by increasingly investing in private equity across emerging markets (EMs) and developing countries (DCs) by improving the access of SMEs in these countries to risk capital and therefore contributing in a powerful way to create jobs and sustain growth,” Noel said.
He also clarified that the World Bank reaffirmed it “fully understands and fully supports the fact that the primary objective of SWFs is commercial returns.”
“But we believe in a ‘sweet spot’ where commercial and economic returns coincide and can reinforce each other; and this is where many of SWFs can bring a lot to support the development of EMs and DCs,” he further said.
Noel said the World Bank saw “a clear developmental angle” where SWFs diversify the portfolio of emerging markets. The diversification, he explained, include both private and public asset classes, such as emerging market bonds and public and private equities, whether by way of direct investing, co-investing, or investment funds.
He said SWFs made decisions on diversifications to EMs based on assessment of political risks, regulatory risks, public equities and fixed income, and securities typically from investment portfolio of SWFs.
Citing the Abu Dhabi Investment Authority (ADIA) managing $700bn in private equity, Noel said ADIA was also the largest SWF investing in private equity with a “target allocation of about 8%”. “But SWFs are also active in private assets and as of last year, 50% of SWFs invested in private equity, mostly to funds and increasingly to co-investments alongside fund managers,” Noel said. He noted that SWFs were “well-suited” to invest in private equities due to the size of the assets they manage and due to the long-term horizon.
Noel also said the World Bank was insisting on private equities because given the right ecosystem, private equity investments could have a significant development impact in providing firms access to capital from start-up to growth.
“Private equity, through the extensive use of due diligence, undertaken as part of portfolio companies, ensure that limited capital resources are allocated to companies that are the most likely to be successful,” he said.
The World Bank official also noted that venture capital and private equity firms “also provide guidance to investing companies to improving management practices in the economy, though investments provide value to the firms by certifying them to the outside world.”
At the macroeconomic level, Noel said investments in private equity in an economy signalled that there was investment opportunity in that economy and also served as a signal to other additional investors. He added that infrastructure was another impact across EMs and DCs. Citing statistics, Noel said 57% of SWFs have already invested in the infrastructure asset class, usually at the early stages of the infrastructure projects.
“We believe that with the large infrastructure finance gap EMs and DCs are facing given their experience in investing in infrastructure in more advanced economies, SWFs, with their asset base and long-term investment horizon, could provide a powerful boost to the finance segment infrastructure in these markets given the right conditions,” he said.
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