Sovereign wealth funds to shape the future of PE

"Over the next two decades, we will see the vast sums of money in the Asian markets come into the western markets, and certainly into private equity," said Eric Warner (pictured), head of investor relations at Altius Associates, speaking at the Guernsey Funds Forum in London yesterday. "Speculation is high that the sovereign wealth fund of Japan is looking into private equity. And to put that in context, the fund size is $1.14trn."

And this shift is already shaping the landscape of European private equity. "Probably the most significant change in the current private equity market is the entrance of sovereign wealth funds," explained Adam Turtle, partner at placement agent Rede Partners. "As very liquid sovereigns entering the market, they have huge power and are having a very significant influence. The biggest difference is their liquidity."

Indeed the allocations to private equity of such funds are already gaining momentum. Of particular note is the blossoming partnership between the sovereign wealth fund of the Qatari government and Italy. In July last year, private equity behemoth Permira selected the investment group of the Qatari royal family as its preferred buyer for luxury fashion brand Valentino.

With liquidity on their side, sovereign wealth funds look set to up their allocations to private equity.

Last year also saw state fund Fondo Strategico Italiano join forces with Qatari investors to launch a €4bn private equity vehicle that will back Italian firms in food, fashion and luxury. The fund is the largest foreign partnership in the Bel Paese.

Elsewhere in Europe, private equity has piqued the interest of sovereign wealth funds. In France, the Qatari sovereign wealth fund is said to be wooing Nicolas Sarkozy with the promise of a €500m commitment to his private equity vehicle.

And earlier in the year, the announcement that French insurer Axa is to sell its private equity arm to a management-led consortium put an end to reports that the Singaporean sovereign wealth fund had been interested in buying the business.

Last year, two Asian and one Middle Eastern sovereign wealth fund were thought to have bought a 10% stake in CVC Capital Partners' management company. Their interest is global.

With liquidity on their side and their eagerness to write big cheques, perhaps it will be the larger fund managers that will benefit the most from the funds. As administrative and regulatory requirements tighten, it appears logical that LPs wishing to put large sums of cash to work may favour the relative ease of investing in one large player rather than back several smaller managers. But how exactly will fund managers win them over?

"I think investing in brand name is going to be very important in the coming years," said Darren Winder, head of strategy at advisory firm Oriel Securities. "You see managers investing very significantly in their brands at the moment," he added.

But as large GPs continue adding to their range of financial products – the rise of credit funds being symptomatic of this – a tension could arise between the personalised approach of a smaller player and the relative anonymity of a one-stop shop. A branding challenge awaits the larger players.

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