Sovereign Wealth and Public Pension Funds Set to Reshape Private Markets

BOSTON—Principal investors—including sovereign wealth funds, public pension funds, family offices, and endowments—play a critical role in the investment world. Evolving expectations, a shifting interest rate environment, and the need to manage increasingly large asset bases for performance and for national and societal impact are transforming how and where these investors allocate capital.

As principal investors assume a more prominent role in the investment landscape and in society more broadly, their relationships with the general partners (GPs) that manage much of their capital are changing, too. To succeed in this new environment, principal investors and GPs must recognize the influence of current market trends and adapt to the shifting dynamics that drive investment strategies across asset classes.

These are among the findings of Boston Consulting Group’s new Global Principal Investors Report 2024, which looks in particular at the subset of sovereign wealth funds (SWFs) and public pension funds (PPFs).

Combined, these entities manage $36 trillion in assets under management (AUM), with a compound annual growth rate of 6% anticipated through 2030. SWFs’ and PPFs’ allocations to private markets have increased by an average of 10% per year over the past decade, driven by considerations of portfolio diversification and the potential for higher returns. We estimate that these principal investors now control up to 70% of all private AUM globally.

“Principal investors are becoming increasingly active in shaping private markets,” said Benjamin Sheridan, a managing director and senior partner at BCG and a coauthor of the report. “Their evolving priorities are not just transforming asset allocation but also redefining the broader capital ecosystem.”

Five Emerging Megatrends

The report identifies five pivotal megatrends that are transforming these key principal investors’ strategies and roles. These trends are reshaping investment priorities and driving broader changes across private markets.

Fundamental business growth attains renewed prominence. Faced with lower returns from traditional strategies, principal investors are focusing on fundamental business growth and margin optimization to deliver value. As deleveraging and multiple expansion lose their potency, operational improvements and organic growth are becoming critical drivers of returns. This trend is particularly disruptive for private equity, which has historically relied on financial engineering for performance.

Co-investing and direct investing build momentum. To boost returns, reduce fees, and gain control over their portfolios, large principal investors are enhancing their co-investing and direct investing capabilities. By adopting advanced analytics and deal-structuring capabilities, these investors are moving away from passive capital provision toward active deal participation.

Geopolitical decoupling shapes capital flows. Geopolitical tensions are prompting principal investors to redirect capital flow. More investments are taking place in emerging markets in Southeast Asia, Africa, and the Middle East. This shift includes aligning investments with national development goals and forging strategic partnerships to navigate political complexities.

Double-bottom-line mandates drive resilience investments. The rise of double-bottom-line funds reflects a growing focus on investments that combine financial returns with societal impact. Many principal investors, particularly SWFs, are prioritizing investments that align with national development goals, climate initiatives, and sustainable growth. This approach enables them to leverage lower costs of capital and longer-term horizons to drive economic and social progress.

Large principal investors play an increasingly visible and public role. As they manage a larger portion of global investments, these investors attract greater public and media scrutiny. The intergenerational nature of principal investors’ mandates makes them more closely attuned to long-term risks such as climate change. At the same time, owning large stakes in companies across a wide range of sectors gives SWFs a unique opportunity to drive the energy transition through active and responsible ownership.

A Collaborative Path Forward

The evolving relationship between principal investors and GPs is also shaping the future of private markets. For principal investors, the path forward depends on their strategic vision and willingness to build internal capabilities or deepen partnerships with GPs and external advisors. For their part, GPs must adapt by offering principal investors more customized investment structures, aligning their incentives with investors’ long-term strategic goals, finding distinctive ways to generate alpha, and demonstrating leadership in sustainability goals.

As the market landscape becomes more complex and competitive, the ability of principal investors and GPs to collaborate effectively will determine their success. Whether through platform partnerships, joint ventures, or new investment vehicle structures, the key to thriving in this new environment is to build relationships that align on both financial and nonfinancial goals. Ultimately, these collaborations will define the roles that principal investors and GPs play in achieving their economic and societal objectives.

Download the publication here.

Media Contact:
Eric Gregoire
+1 617 850 3783
gregoire.eric@bcg.com