Deployment challenges are limiting sovereign Risk of fund withdrawals is slowing further ability to match targets illiquid asset investment In previous reports, we observed sovereigns! return The ability of sovereigns to respond to the return gaps, driven by low interest rates and challenging gap is being limited by the increasing likelinood of targets for fixed income allocations. We have also withdrawals. Over the past three years, governments noted how appetite for alternatives has grown as have responded to economic volatility by reducing sovereigns seek greater returns from private markets. new funding to sovereigns and, in some cases, In last year’s report, we demonstrated that high levels | drawing down from sovereign reserves, as seen of competition in infrastructure and private equity in figure 5. were causing sovereigns to shift deployment of real While previously only liability sovereigns assets towards real estate. experienced regular drawdown of funds (in the form Competition for infrastructure and private equity — of outflows to beneficiaries), an increasing propensity deals has accelerated in 2016, with deployment for government withdrawals is encouraging times increasing across alternative asset classes investment and liquidity sovereigns to consider the (figure 4). While the growth in these times is small, liquidity of their portfolio. Liquidity sovereigns were it is significant: sovereigns are increasingly dependent comfortable in their ability to withdraw from their on their alternative investments to generate yields, portfolio at short notice, however, many sovereigns however, growing levels of undeployed capital for stated that liquidity management was an entirely alternative investments are being held in cash and new objective, with certain investment sovereigns money market funds, so that sovereigns canrespond responding by creating tactical allocations to cash quickly when real asset opportunities arise. These and money market funds. This has