Global sovereign wealth funds (SWFs) held back on capital deployment and minimised their exposure to emerging markets in 2022 amid a tough investment climate.
Sovereign wealth funds’ direct investments across emerging markets, developed markets, and frontier markets in 2022 stood at $71.3 billion, a tad lower than the previous year’s $74.2 billion, according to a recent report by the International Forum of Sovereign Wealth Funds (IFSWFs)
However, SWFs’ direct investments in emerging markets dropped by almost 70% to $10 billion in 2022 from $33 billion in 2021. Direct investments in developed markets rose from $39 billion to $59.6 billion in the same period, show data from IFSWF, which has created a proprietary database of direct equity investments by sovereign wealth funds since January 2015.
China’s zero-COVID policy hamstrung investments in the country by SWFs in 2022. SWFs’ investments in China fell from $4 billion in 2021 to only $1 billion in 2022 amid lockdowns and travel restrictions that stymied the country’s manufacturing industry, the bedrock of its economy.
This also had an impact on supply chains in Southeast Asia, where sovereign wealth funds’ investments plunged from $9 billion in 2021 to $1 billion in 2022.
The ongoing US-China geopolitical tensions and Western sanctions on Russia have also played a part in the movement of capital inflow in emerging markets. “Removing this major emerging market from sovereign wealth funds’ investment universes may impact their investments in these countries,” said IFSWF in its report.
“However, as sovereign wealth funds learn to navigate an increasingly fragmented foreign direct investment environment, they will likely find opportunities elsewhere, possibly in Southeast Asia and India.”
Another reason for the decline in emerging-market investments by SWFs was the fall in their domestic investments, as many are from emerging and frontier markets. In 2022, SWFs invested $8.5 billion in their home markets, just around half of the $16 billion invested in 2021.
While there was a decrease in domestic investments between 2021 and 2022, the level of investment in 2022 still exceeded the amount invested in 2019 by a considerable margin.
IFSWF, nevertheless, has a strong conviction that direct investments in domestic economies will continue as new sovereign wealth funds in emerging and frontier markets cover domestic development.
“They will continue to invest in their home economies, particularly as rising geopolitical tensions have contributed to the rise of inward-looking merger control policies that inhibit the cross-border free flow of capital,” it said.
The prevailing conditions could present an opportunity for sovereign wealth funds to deploy capital into emerging markets. The easing of COVID restrictions in China by December 2022, coupled with its economy’s rebound and 4.5% growth during the first quarter of 2023, may expose additional investment prospects within China.
The recovery could open doors for potential opportunities in Southeast Asian markets along the supply chain. Consequently, sovereign wealth funds may find favourable circumstances to explore and invest in these regions.
Sovereign wealth funds made a total of 97 investments across startups in 2022, which is the second-highest number recorded after 2021’s record 133 deals.
Fewer late-stage deals
Sovereign wealth funds have become more cautious in their approach towards IPO-stage investments and shifted towards making investments with more robust liquidity in earlier-stage companies in 2022.
The number of IPOs in which sovereign wealth funds acted as anchors also saw a sharp decline, hitting a record low of only ten investments—the lowest number of IPO investments recorded in the IFSWF Database.
