The Art of Liquidity Investing for Sovereign Funds

Several sovereign wealth funds invest a portion of their assets to capture and harvest the illiquid premium. Hence the improved aggregate demand for private equity, real estate, and infrastructure investments. Given their long-term nature, more and more SWFs are searching for means to capture this premium and capitalize on it.

Take for instance Europe’s largest sovereign wealth fund, the Norwegian Government Pension Fund – Global (GPFG) which allocates most of its assets into fixed income and public equities. Norway’s GPFG has greater liquidity compared to most other similarly-sized sovereign wealth fund peers, university endowments, and larger pension plans. The fund has taken strides to invest in more illiquid assets such as its gravitation towards institutional real estate.

Other SWFs have been more aggressive by using the illiquid premium such as Singapore’s GIC which makes direct company investments into companies and the Qatar Investment Authority.

Over the long haul, some studies have shown that illiquid assets can generate amazing returns; this was seen in the early endowment model that many private university endowments followed. Sovereign investors need to advance with caution as the illiquid premium cost is contingent on the liquidity demands of liabilities. Unfortunately in 2008-2009, the crisis caused severe strain and turmoil rendering some fire sales and generating losses. Illiquid assets can be a major burden for investors. Sovereign funds on the other hand, especially ones without contingent liabilities can weather out longer holding periods.



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