Sovereign wealth funds have retreated from investing directly in companies over fears about the valuations of private businesses and as state-backed funds come under pressure from low commodity prices.
Direct investments by state-backed funds into areas such as private companies and infrastructure have fallen to their lowest levels in at least six quarters, according to the Sovereign Wealth Fund Institute, a research organisation.
A $3.5bn investment in Uber, the ride-hailing app, by Saudi Arabia’s sovereign fund was not enough to see off a 42 per cent fall in allocations.
State-backed pension and wealth funds, which are used by countries to save for future generations, invested just $73.2bn directly in companies in the first half of 2016. This compares with $126.7bn for the same period in 2015.
In its report, the SWFI said the fall in direct investments could be linked to a shift towards alternative investment funds and concerns about valuations. “There [are] gaps between buyer and seller valuations,” it said.
There are concerns that the valuations for many unlisted start-ups are too high and could lead to the market overheating, leaving investors nursing losses in the process.
The number of unicorns — private start-ups with billion-dollar valuations — has soared in recent years, as investors tried to access fast-growing technology companies.
Amin Rajan, chief executive of Create Research, the consultancy, said: “A combination of monetary easing and media hype has pushed tech valuations into the stratosphere, forcing [sovereign wealth funds] to sit on the sidelines.”
However, state funds are still interested in investing in some tech companies, which is an “endorsement of their belief in disruption to drive returns”, the SWFI said.
Mr Rajan added that low commodity prices have also hit direct investments, because state funds in oil-rich countries have been forced to rein in spending.
“A fair chunk of the reduction [in direct investing] has come from oil-producing countries, where public finances have taken a big hit from the headlong decline in oil prices over the past two years,” he said. “They are now investing at home in infrastructure projects normally funded by their governments.”
The oil price dropped to under $30 a barrel earlier this year, down from $110 in 2014. It is now stands at $45 a barrel.
Sven Behrendt, managing director at Geoeconomica, a consultancy, said there are signs that state funds are “investing less, but not redeeming money [from their investments]” on the back of the oil-price fall. He added that the fall in direct investments is likely to be due to state funds diversifying their holdings.
The SWFI report additionally found that with the exception of Saudi Arabia’s stake in Uber, most state-backed funds have “overwhelmingly pursued smaller average deal sizes” so far this year, partially because of “expanded regulatory scrutiny on large deals”