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The world of investment attraction is intensely competitive. Numerous investment promotion agencies and thousands of special economic zones globally strive to secure a portion of FDI. Often, they become so engrossed in the details of investor outreach that they miss the broader picture. This situation is especially evident in strategies to attract sovereign investors. Global asset owners and managers have long pursued alternative investments, seeking profitability beyond traditional stocks and bonds. This shift has made them significant players in international investment, particularly in infrastructure and real estate.

Recently, sovereign investors, such as public pension funds and sovereign wealth funds, have targeted critical infrastructure, energy, real estate, and even manufacturing. IPAs and SEZs can no longer overlook these substantial capital pools. However, engaging with these investors requires a departure from traditional methods.

Public pension funds’ assets under management increased from $17.9 trillion in 2018 to $23.1 trillion in 2023. Similarly, sovereign wealth funds’ AuM grew from $7.4 trillion to $11.2 trillion during the same period, as reported by Global SWF. Combined, they manage $34 trillion. Post-pandemic, sovereign investors funneled unprecedented capital into real estate and infrastructure. They hit record investment levels in 2021 and 2022 before adjusting in 2023. Their interest in alternative assets continues to rise. According to an Invesco survey, sovereign investors, excluding PPFs, increased their infrastructure and renewable energy investments from 2.8% of total AuM in 2016 to 7.1% in 2023. Real estate exposure also grew from 6.5% to 8% in the same period.

For PPFs, data shows a similar trend. U.S. PPFs’ allocation to alternative assets doubled from 15% in 2017 to 30% in 2023. Major PPF programs in Canada, Northern Europe, and East Asia followed comparable paths. Several factors drive this trend. Sovereign investors aim to preserve and grow wealth for their beneficiaries and future generations. They diversify away from traditional assets to seek higher returns. This strategy intensified post-financial crisis and following recent interest rate hikes.

The scarcity of domestic opportunities also propels sovereign investors to look abroad. For instance, Australian supers seek opportunities outside their saturated domestic market. Gulf Cooperation Council (GCC) sovereign investors, facing high domestic oil and gas exposure, expand into strategic industries and infrastructure overseas.

Governments globally can leverage this trend to attract funds, especially given the infrastructure gaps in developing countries and the need for infrastructure overhauls in developed nations. Limited fiscal resources make sovereign investors’ engagement even more crucial.

Sovereign investors primarily use cross-border project finance. They prefer co-investment or collaboration with like-minded investors, including other funds, multinational companies, multilateral financial institutions, or development agencies. Five major factors influence their investment decisions: a stable and transparent regulatory framework, attractive risk-return profiles, robust exit mechanisms, trust and partnership, and a sound sustainability regulatory framework.

Governments must ensure their economies meet these criteria to attract sovereign investors. They need to offer clear, consistent rules, competitive returns, effective exit strategies, trustworthy relationships, and alignment with sustainable development goals.

IPAs and SEZs play a crucial role in attracting FDI from sovereign investors. They must identify and target relevant funds, promote investment opportunities, facilitate the investment process, retain and expand existing investments, and advocate for a conducive investment climate. These agencies should use their networks and research capabilities to profile funds, promote the host country’s advantages, assist with site selection and regulatory issues, and provide continuous aftercare and feedback.

International organizations and multilateral financial institutions can support these efforts. They raise awareness, assist IPAs and SEZs, and establish global partnerships. Organizations like UNCTAD, the OECD, and the ITC should collaborate with development banks to improve business climates and promotion capacities in host countries. They can also strengthen sovereign investors’ ability to invest in cross-border projects in both infrastructure and real sectors.

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