Why Asia’s sovereign wealth funds go direct, co-invest in PE deals – and who’s at risk

[SINGAPORE] Asia’s sovereign wealth funds (SWFs) are increasingly taking direct stakes and co-investing alongside private equity firms this year – with the trend likely to continue into 2027, experts told The Business Times.

They are playing a bigger role in recent high-value transactions, with sovereign-backed deal value tripling year on year to US$200 billion globally in 2025 from US$67 billion, based on S&P Global data.

The funds are shifting away from investing as passive limited partners (LPs) – an arrangement that typically provides returns only every few years.

LPs – which can be institutional or high-net-worth investors – act as financial backers investing money into a business or fund, in exchange for a share of the profits, without taking part in the daily management of it.

Reasons for moving away from LPs include:

• higher interest rates driving the cost of capital;
• compressed company valuations; and
• private markets – previously a key engine of investment outperformance – maturing.

Fees paid out to general partners (GPs) – more active fund managers – and LPs, are rising steadily against this backdrop.

This affects the sovereigns, who simultaneously want more ownership in their deals, and are hence more incentivised to seek zero fee or carry models via direct or co-investments.

As such, direct and co-investments represent 50 to 60 per cent of sovereign private market deployment, based on Bain and Company data as at Jun 22. This is up from about 40 per cent in 2023.

Why sovereigns are stepping up

James Ong, group head of asset management at CGSI Singapore, said three reasons exist for why SWFs excel at long-term capital development.

“Sovereigns are structurally patient over decades, have tremendous government relationships, and do not need to raise money – as they are state-backed,” he said in an interview with BT.

More direct or co-investments by the funds will hence allow them to commit their own equity while leading consortia, alongside their traditional fund allocations.

This is most advantageous to savings-pool and development sovereigns without near-term liabilities or borrowing programmes, which can hold capital longer than traditional closed-end private equity funds, said analysts from CFGI Singapore.

Examples of savings-pool sovereigns include the Kuwait Investment Authority, Norway’s Government Pension Fund Global, and GIC in Singapore.

Singapore’s state-owned multinational investment firm – Temasek Holdings – acts more as a development sovereign, with its dual mandate of generating financial returns as well as delivering positive outcomes to social communities.

Different sovereigns can come together to achieve a multi-investor platform, too. This is seen via the Galaxy Orientis China-Asean Investment Platform – a private equity programme focusing on long-term investments across the China-Asean corridor backed by three sovereign wealth funds – launched on Apr 13 this year.

China Investment Corp, Indonesia Investment Authority and the State Oil Fund of the Republic of Azerbaijan jointly anchor the platform, which secured around US$520 million in its first close. The fund plans to expand it to US$1 billion.

CGSI Securities, the overseas arm of China Galaxy Securities, is the platform’s GP, and provides regional expertise, operational support and networks across South-east Asia.

The challenge with more hands on deck through a multi-governance structure may be how things get “operationally more painful”, said Ong.

In the longer term, however, experts agreed such a move helps the money become a lot more “sticky”, as the cost and duration of their capital in this setup is still an advantage.

Risks for PE sponsors

This direction by sovereigns, however, suggests how traditional private equity sponsors are exposed to the risk of losing the largest transactions, said CFGI analysts.

For one, the tripling of sovereign-backed deal value in 2025 is not straightforward, said experts.

They explained how this surge corresponds to only about a 13 per cent rise in deal count, pointing to concentration in “a small number of very large transactions” rather than a broad expansion of activity.

Typically, the structural response for private equity sponsors is to lean into mid-market assets, where sovereign capital is less active.

As such, consortium structures are built on larger assets where sovereign and private equity mandates can be “complementary rather than competing”, they told BT in an e-mail.

In such a structure, the GP contributes origination and operational capability, while the sovereign contributes duration.

But if sovereigns increasingly seek co-investments and direct exposure in place of blind pool fees, this affects an “already constrained” fundraising market, said analysts.

Blind pool fees are management and operational charges paid by investors to a fund manager (in this case, a GP) to run an investment vehicle before specific target companies or assets have been chosen.

Vincent Ng, co-head of client solutions Asia at Partners Group, says even amid heightened market competition, private equity sponsors still have a place in most large-scale sovereign transactions, given that their operational know-how is valued.

Other industry observers, however, are divided on the outlook.

“Capital is consolidating into fewer and larger managers, and (present) sovereign behaviour accelerates that consolidation,” said CFGI.

IPO exit?

At this juncture, state-linked capital is emerging as a potential liquidity channel in specific situations, particularly in South-east Asian markets with “thin” initial public offering windows, said CFGI analysts.

This was noted in Khazanah-led Malaysia Airports privatisation in February 2025; and Quadria Capital’s take-private buyout of Apex Healthcare in February this year, whose consortium drew co-investment from Malaysia’s Employee Provident Fund, Temasek-backed 65 Equity Partners, and China’s Silk Road Fund.

Additionally, Asean’s SWFs are now making “selective Gulf allocations” in digital infrastructure, analysts told BT.

Artificial intelligence and energy transition were also among the themes which deals dominated in.

That said, trade sales, sponsor-to-sponsor secondaries, and traditional exit routes remain the primary documented channels across Asean, they added.

“Whether sovereign capital becomes a broader exit theme depends on how mandates evolve as more assets reach maturity,” said analysts.