UK a major destination for sovereign investment – as assets of sovereign wealth funds climb to record $4.8 trillion in 2011

Assets under management of sovereign wealth funds (SWFs) increased for the third year running in 2011 to a record $4.8 trillion according to our new report Sovereign Wealth Funds 2012. There was an additional $7.2 trillion held in other sovereign investment vehicles, such as pension reserve funds, development funds and state-owned corporations' funds and $8.1 trillion in other official foreign exchange reserves. Our projections are that SWFs’ assets will grow by 8% in 2012 to $5.2 trillion, following the 9% increase in 2011. Taken together, governments of SWFs, largely those in emerging economies, have access to a pool of funds totalling $20 trillion. Some of these funds could in future be channelled towards funding development of infrastructure for which there is global demand.

There are two types of SWFs: those funded by commodities' exports (primarily oil and gas), totalling $2.7 trillion at the end of 2011 or 56% of total assets; and non-commodity SWFs totalling $2.1 trillion which are projected to increase more quickly as some Asian countries, particularly China, continue to build up foreign exchange reserves. Countries affected by the recent political instability in the Middle East and North Africa collectively manage around $160bn in SWF assets or around 4% of the total.

The UK is an important centre for SWFs as a:

• key location from where some of the funds are managed. A number of funds from Kuwait, Brunai, Singapore and United Arab Emirates have representative offices in London;

• clearing house for SWF transactions;

• major recipient of investment funds, the UK’s 17% of global SWF investments in the past six years was second only to the 19% share of the US.

Marko Maslakovic, Senior Manager, Economic Research at TheCityUK, said: "The UK is the leading destination for SWF investments in the EU, attracting more capital than France, Germany and Spain combined. The most recent example is the acquisition of nearly 9% of the holding company for Thames Water by the China Investment Corporation, the fund’s first major share purchase in the UK.”

Direct investments of SWFs totalled $60bn in 2011, down a quarter on the previous year and 40% below the peak level in activity two years earlier. Companies in the financial services sector, energy and utilities/infrastructure received most of the funding. SWF Institute data shows that the financial services sector was the largest recipient of direct investments in the six years to 2011, accounting for over a third of more than $400bn invested during this period. Recent transactions suggest that SWFs remain cautious, equity purchases are smaller and more diverse with more focus on diversifying portfolios. Emerging market countries have accounted for a growing share of investments since 2009, a trend that is likely to continue.

* TheCityUK thanks Invesco Ltd. for sponsoring this report.