High concentration in stock markets and national security concerns send SWFs to private credit and infrastructure
Surging levels of concentration in equity markets are pushing cash-laden sovereign wealth funds into unlisted assets such as private equity, private credit and infrastructure.
The switch is the latest demonstration of how the rapid expansion of AI is reshaping financial markets, with big investors moving out of highly concentrated stock markets and into private credit and infrastructure to make bets on the rapid build-out of data centres and the energy sources needed to power them.
“Capital is rotating towards infrastructure and private credit,” said Benjamin Jones, global head of research at Invesco. “The bar for passive market exposure is rising . . . [there is a] rotation away from concentrated listed equity.”
Invesco’s annual survey of the investment intentions of 90 SWFs with combined assets of $17.2tn found that a net 17 per cent plan to cut their exposure to listed equities, a sharp reversal of intentions from previous years.
In contrast, a net 28 to 35 per cent plan to increase their holdings in private equity, private credit and infrastructure this year. The average allocation to infrastructure had already almost doubled to 9 per cent between 2022 and 2025.
“The AI wave is currently best captured in private credit and infrastructure opportunities,” one Middle Eastern fund told Invesco.
Temasek, Singapore’s state-owned $335bn fund, said 49 per cent of its portfolio was already in unlisted assets as of last year, while Mubadala, the $385bn UAE fund, already has 59 per cent of its assets in private equity, infrastructure and real estate.
The exodus from public markets is largely being driven by surging concentration risk. The weight of the 10 largest stocks in the S&P 500 has doubled to 38 per cent over the past decade, as the Magnificent 7 group of giant technology stocks powered ahead of the wider market.
There has been “a significant turn against equities” this year, said Josette Rizk, head of the Middle East and Africa region at Invesco. “Index-heavy passive strategies now carry significant exposure to a small number of large-cap technology companies, and several respondents described reviewing whether the diversification they assumed [to come] from broad market exposure is actually present.”
She added that one European SWF had noted that “combining passive wrappers can obscure concentration risks that are only visible at the [individual] portfolio level”.
A related concern is that a longstanding inverse correlation between public equities and bonds has broken down since the inflation shock of 2021–22, raising the risk that both asset classes sell off at the same time rather than one cushioning losses in the other.
“The bond-equity relationship that underpinned many portfolio construction frameworks is being questioned. Putting equities and bonds together is not going to give you a resilient portfolio in the same way it did in the past,” said Jones.
In contrast, SWFs have largely shrugged off concerns over the health of private credit, despite fund managers such as Blue Owl, Apollo, Ares, BlackRock and Blackstone limiting withdrawals from their lending funds this year as redemption requests have surged.
Demand for infrastructure investments has risen sharply, partly for the potential financial returns but also because they can align with national security requirements, such as building data centres domestically to sidestep any pitfalls from data being stored in a third country.
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Steve Johnson in London