Sovereign funds may have biggest impact on alternative assets

HONG KONG, May 22 (Reuters) - Sovereign wealth funds, which control up to $3.7 trillion in assets and have been making headlines as they buy assets in the West, will ultimately have the biggest impact on private equity and hedge funds, analysts at JPMorgan Chase said in a report on Thursday.

State-run investment funds currently own up to 7.5 percent of so-called alternative assets, or about $340 billion, and this stake could grow to as high as 17 percent by the end of 2012, said David Fernandez and Bernhard Eschweiler, analysts at the bank. "The main beneficiaries of the increased allocation by SWFs to alternatives are set to be private equity firms and hedge funds. These managers offer skills, resources and expertise that would be difficult for most SWFs to develop on their own," they said in the report. Indeed, last year one of the highest profile deals among sovereign wealth funds was the China Investment Co Ltd's purchase of a $3 billion stake in U.S. private equity firm The Blackstone Group (BX.N).

Sovereign funds from the Middle East and Asia were also highly active in providing more than $43 billion in capital to Wall Street banks starved of funds during the credit crisis that erupted last summer.

Sovereign wealth funds -- JPMorgan Chase cataloged 50 of them -- are pools of money derived from official surpluses, such as foreign reserves, commodity revenues or fiscal sources. Profits from the funds are meant for the benefit of a particular nation's future generations.

A steady and deep source of capital for many private equity firms and hedge funds will likely be welcome news, especially since many private investors have become more risk averse lately.

The report also cites talk that sovereign funds may provide private equity with debt financing for leveraged buyout deals, replacing bank financing, which dried up in the face of the crisis.

However, Fernandez and Eschweiler questioned whether the sovereign funds have the expertise to underwrite such deals.

Evidence of such lack of market experience is the fact that 60 percent of sovereign funds utilise external money managers to handle their investment decisions.

The asset management industry, led by prominent names like AllianceBernstein (AB.N) and PIMCO, will therefore be big beneficiaries of sovereign fund money. "Going forward, the share of externally managed SWF assets is set to rise as more funds move into equity and alternatives. But the biggest boost will come from the underlying asset growth," the report said.

Overall, Fernandez and Eschweiler expect sovereign fund assets to double over the next five years to $6 trillion-$7 trillion.

(Reporting by Kevin Plumberg; editing by Anne Marie Roantree)