Whenever Singapore’s GIC sovereign wealth fund reports its annual numbers, the first place we turn is the portfolio asset mix. Sovereign funds, in the main, move at a tectonic pace, so the year-on-year shifts are rarely dramatic. But viewed over a decent time horizon, they’re like rings in the trunk of a tree: each one identifiable as of a particular age and time.
Let’s compare this year’s report, expressing the position on March 31 2023, with the report for 2017. The differences are stark. Back then – and we’re only talking six years – private equity accounted for 9% of the portfolio (and that was considered pretty bullish) and real estate 7%.
Today, private equity is 17%, real estate 13%. In the same time frame, developed market equities have dropped from 27% of the portfolio to 13%, while emerging market equities (17% today), nominal bonds and cash (34%) and inflation-linked bonds (6%) have barely budged.
This is an allocation that reflects the themes either side of a pandemic: first, a zero interest rate environment in which yield was everything; then, in parallel, an environment in which the private markets came to demonstrate a risk-reward equation quite superior to that in listed markets. And then, of course, the aftermath: soaring inflation, rising rates and the spectre of recession.
There is a sense that this is the logical summit for private equity and real estate, and that the private market bonanza may be coming to a close
This last point is the hardest to position for in portfolio terms, but one has the sense that when we look back at the 2023 position in, say, six years, it too will seem a historical record. There is a sense that this is the logical summit for private equity and real estate, and that the private market bonanza may be coming to a close. Both are already at the top of their target ranges within GIC’s policy portfolio, and that’s after they already changed the target ranges in that portfolio to accommodate more private equity and real estate in the first place.
In comments to the Financial Times this week, senior figures at GIC warned that the tailwinds for private equity had come to an end. With higher interest rates have come higher costs of leverage.
Assets are often not available at realistic valuations that reflect the changed world, which is partly because there are still so many funds with dry powder to deploy, and so many institutional investors like GIC desperate for exposure to the asset class. Bain & Co says private markets fundraising is likely to fall 30% this year relative to 2022.
For decades, GIC has been among the most sophisticated investors in the world when it comes to private equity and real estate. There are highly refined investment teams for both themes (and infrastructure): private equity alone breaks down further into buyouts, minority-growth, pre-IPOs, venture capital, private credit, distressed debt and secondary. Most recently it built a sustainability solutions group within the private equity team.
It invests directly and through funds; it works with over 100 active fund managers in relationships painstakingly built up over many years. The private equity CIO, Choo Yong Cheen, serves on the group executive committee. The CIO for real estate, Lee Kok Sun, does not, but he’s on the investment management committee, among other things.
Challenging mandate
In real estate, GIC in its own right is one of the biggest investors in the world. More than half of its new investments covered in the latest report were in real estate, which grew from 10% to 13% of the portfolio in a single year.
So, we shouldn’t discount the idea that GIC might have the edge in this new world. If the private equity industry really unravels, and investors try to offload positions within it, then that’s an opportunity for truly long-term investors like GIC. Likewise distressed real estate.
But certainly, GIC is looking around at an investment world barely recognizable from a few years ago and realizing its mandate has become a lot more challenging than it once was. Like many sovereign funds, its benchmark is beating inflation, albeit over the long term (a 20-year metric is the one most frequently reported).
On that time horizon GIC’s doing fine – it beat global inflation on average by 4.6% in 2023, up from 4.2% in 2022 – but in the immediate term, GIC is having to beat a far higher inflation number than it has for a generation.
“We are not out of the woods yet,” says CEO Lim Chow Kiat in his letter to stakeholders. “The consequences of… policy tightening are still being felt in the economy and markets.” Banks face lower profitability due to higher funding costs and potential loan losses, he said. “At the same time, de-globalization pressures continue to build up, fuelled by intensifying great power rivalries.” He also mentioned climate.
Expecting to see interest rates ‘higher for longer’, Lim said: “Absent another major shock to financial markets or economic growth, we have likely left behind us the world of zero interest rates. While the resulting higher prices of capital will benefit long-term investors, the transition to a higher interest rates world will be difficult for many businesses and even countries.”
For those with models reliant on low rates, he added, “even their viability may be in doubt.” Lim also referenced the disruptive power of generative AI.
The answer to all this disruption? A resilient portfolio, infrastructure assets and sustainability, he said. The answer is surely not going to include even more private equity.
