SINGAPORE/BEIJING Sovereign wealth funds, currently a big source of capital for private equity and hedge fund managers, may increasingly become their competitors as they seek to manage assets for outside investors.
While external money currently accounts for just a small part of total assets of the wealth funds, state investors from Abu Dhabi and Singapore now view clinching mandates from pension funds and family offices as part of their business, putting them in direct competition with private sector managers.
"In the medium term -- a five-year time horizon -- the largest and top-performing multi-strategy funds in the world might well be those run by sovereign wealth funds, and not by the traditional and best known players in the hedge fund space," said Aureliano Gentilini, Lipper's global head of hedge fund research.
Even China Investment Corp (CIC) , a relatively new sovereign fund unlike its Middle East counterparts, is getting into the act through CITIC Capital, which last month raised $925 million for a China buyout fund.
CIC, which has $300 billion under management, bought a controlling 40 percent stake in CITIC Capital late last year, providing a new platform to the young sovereign fund to expand its investments and tap new business.
CITIC Capital focuses on China deals and also runs hedge fund business in Japan, where CIC has not yet made an investment but regards as a top destination to explore this year, said a source familiar with CIC's investment strategy.
In January, Lou Jiwei, head of CIC, told an industry forum in Hong Kong that this year CIC would focus on its own asset management to avoid over relying on external asset managers whose performance, some analysts said, didn't impress CIC.
Abu Dhabi-owned Invest AD told the Reuters Private Equity and Hedge Funds Summit it hopes to raise $325 million in outside money for a private equity fund that will invest in growth companies in the Middle East and North Africa.
"We have been investing for over 30 years on behalf of one client -- the Abu Dhabi government. The natural next step is to open our platform and leverage on our existing expertise," its Wharton-educated head of private equity Samir Assaad said at the Summit.
"It's a natural evolution of the company's growth," he said, adding the move was in line with the emirate's plan to diversify the economy and develop the financial sector.
Invest AD is owned by Abu Dhabi Investment Council, the emirate's second wealth fund. It has to date set up an infrastructure platform with UBS that has attracted $250 million of commitments. It also raised $100 million of third-party money for its first Middle East and North Africa private equity fund.
In an environment where capital is scarce, PE funds linked to sovereign wealth funds have the advantage when courting small promising firms because of their deep pockets and reputation as long-term investors, Assaad said.
Observers said the move by sovereign wealth funds to manage third-party money stems from greater confidence in their abilities as well as a desire to earn fees from fund management.
Setting up separate entities that can charge hedge fund-like fees and accept outside money will also help sovereign funds retain star managers, said Melvyn Teo, director of Singapore Management University's BNP Paribas Hedge Fund Center.
"Another possibility, at least in Temasek's case, is that the funds wants to be seen less as a sovereign wealth fund and more as a professional investor. They are keen to strip away the baggage that comes with being seen as an SWF."
Singapore wealth fund Temasek Holdings TEM.UL recently set up and seeded a multi-billion-dollar investment firm that will eventually take money from institutional investors as well as the city-state's citizens.
Sovereign funds will still face concerns about transparency and the possibility of political agendas when competing for third-party money, but observers said the gap is not insurmountable for the larger and more established funds.
"Having been around for a while, sovereign funds have the ability to attract top talent. They also know the institutional investors. Ultimately, this is vertical integration of the business and this will be the trend going forward," said Singapore Management University's Teo. (Editing by Neil Chatterjee and Muralikumar Anantharaman)